franchise 2021 - association of corporate counsel

Franchise 2021A practical cross-border insight into franchise law

Seventh Edition

Featuring contributions from:

ǼLEX

Anderson Mōri & Tomotsune

Birgelen Wehrli Attorneys

British Franchise Association

Daniel Law

DC Strategy Lawyers

Dentons Canada LLP

Freeths LLP

Hammad & Al-Mehdar Law Firm

International Franchise Association

Jones & Co.

Kennedy Van der Laan

Law Firm LIN

LINKEA

Noerr LLP

Rödl & Partner

Rosen Karol Salis, PLLC

SCA RUBIN MEYER DORU & TRANDAFIR

Semenov&Pevzner

THUM Rechtsanwaltskanzlei ǀ Law Firm

Franchise 2021Seventh Edition

Contributing Editor:

Iain BowlerFreeths LLP

©2020 Global Legal Group Limited. All rights reserved. Unauthorised reproduction by any means, digital or analogue, in whole or in part, is strictly forbidden.

DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehen-sive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

ISBN 978-1-83918-073-6ISSN 2055-8082

Published by

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Consulting Group Publisher Rory Smith

Publisher James Strode

Editor Oliver Chang

Senior Editor Sam Friend

Head of Production Suzie Levy

Chief Media Officer Fraser Allan

CEO Jason Byles

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Strategic Partners

Table of Contents

Expert Chapter

Q&A Chapters

8 Delivering Growth – The Third WayIain Bowler, Freeths LLP

3 The Role and Transformation of the bfaPip Wilkins QFP & Emily Price QFP, British Franchise Association

12 AustraliaDC Strategy Lawyers: Nina Rossi

21 AustriaTHUM Rechtsanwaltskanzlei ǀ Law Firm

128 NigeriaǼLEX: Davidson Oturu, Tiwalola Osazuwa & Frances Obiago

135 RomaniaSCA RUBIN MEYER DORU & TRANDAFIR: Cristina Tararache

Industry Chapters

1 IFA’s Role Shaping the History and Future of FranchisingInternational Franchise Association

33 BrazilDaniel Law: Antonio Curvello & Guilherme Corrêa Filho

43 CanadaDentons Canada LLP: Helen Fotinos, John Papagiannis & Stacy Shields

53 ChinaJones & Co.: Paul Jones & Xin (Leo) Xu

72 FranceLINKEA: Cecile Peskine & Clémence Casanova

80 GermanyNoerr LLP: Dr. Tom Billing

91 ItalyRödl & Partner: Roberto Pera & Gennaro Sposato

100 JapanAnderson Mōri & Tomotsune: Kenichi Sadaka & Aoi Inoue

109 KoreaLaw Firm LIN: Yong-Gap Kim & Keejeong Kim

143 RussiaSemenov&Pevzner: Ekaterina Smirnova & Alexey Pereverzev

151 Saudi ArabiaHammad & Al-Mehdar Law Firm: Suhaib Hammad

158 SwitzerlandBirgelen Wehrli Attorneys: Dr. Jeannette Wibmer

169 USARosen Karol Salis, PLLC: Richard L. Rosen, John A. Karol & Leonard S. Salis

61 England & WalesFreeths LLP: Iain Bowler

117 NetherlandsKennedy Van der Laan: Martine de Koning

Welcome

From the PublisherDear Reader,

Welcome to the seventh edition of International Comparative Legal Guide – Franchise, published by Global Legal Group.

This publication provides corporate counsel and international practitioners with comprehensive jurisdiction-by-jurisdiction guidance on franchise laws and regulations around the world, and is also available at www.iclg.com.

This year, two chapters by leading industry bodies offer organisational overviews.

One expert chapter explores franchising as an avenue for growth.

The question and answer chapters, which in this edition cover 18 jurisdictions, provide detailed answers to common questions raised by professionals dealing with franchise laws and regulations.

As always, this publication has been written by leading franchise lawyers and industry specialists, for whose invaluable contributions the editors and publishers are extremely grateful.

Global Legal Group would also like to extend special thanks to contributing editor Iain Bowler of Freeths LLP for his leadership, support and expertise in bringing this project to fruition.

Rory SmithConsulting Group PublisherGlobal Legal Group

Welcome

Franchise 2021

Chapter 1 1

IFA’s Role Shaping the History and Future of Franchising

International Franchise Association

Franchisee InclusionThe importance of franchisee inclusion came into sharp focus when two of IFA’s founding franchisee members, Steve Siegel (then with Dunkin’ Donuts) and Lawrence “Doc” Cohen, CFE (Great American Cookie Company), in 2002 and 2006, respec-tively, took on the role and responsibility of leading IFA as Executive Chairmen. They laid the groundwork for today’s Chair, FASTSIGNS International CEO, Catherine Monson. IFA represents more than 10,000 franchisee-members, with industry-leading single and multi-unit franchisees serving as members of the IFA Board of Directors, Franchisee Forum and on every IFA committee and task force.

Rounding out what former IFA Chairman Russ Frith, CFE (at Lawn Doctor), called IFA’s ‘three-legged membership stool’, are the more than 600 professional advisors and supplier firms that support franchising. Suppliers have played an important lead-ership role in the organisation since 1968 when attorney Philip Zeidman, a partner of Brownstein Zeidman & Shomer (now DLA Piper), was appointed general counsel when the associa-tion moved its headquarters from Chicago to Washington, D.C.

Participation in the IFA leadership is available to all members based on the bottom-up structure designed to encourage our members to contribute and lead through: committee and task force membership; Franchisor, Franchisee and Supplier forums; the IFA Foundation; the Board of Directors; and the Executive Committee.

IFA FoundationSupporting the membership and contributing to the direction of IFA is its Foundation. Through its flagship education and certi-fication programme, outreach and support of military veterans in franchising, and by acting as a bridge between franchising and diverse communities, the Foundation helps to shape the future of franchising. The IFA Foundation provides the fran-chise community and its advocates with the tools and knowl-edge to promote and protect the franchise business model, while ensuring that it remains inclusive, diverse and a force for good in communities around the country and the world.

One of the most important accomplishments of the IFA Foundation came in 1991 when it established the Certified Franchise Executive (CFE) programme to elevate professional standards in the field of franchise management.

Similar to certification programmes in other professional organisations, the CFE is recognised as an important designa-tion of competence in franchise knowledge and management excellence.

Since 1991, nearly 1,200 franchise professionals have earned the coveted designation of CFE that requires a diverse and

Washington, D.C.-based association leads franchising forward.

Great institutions often begin with a simple idea. The founders of the International Franchise Association were not only vision-aries, but also agents of action. They set out with an idea to build an association that would represent and advocate for the ideas and interests of the business model that helped them achieve success. Today, IFA continues to carry out the mission of protecting, enhancing and promoting franchising as it spreads across the globe.

IFA began as an organisation representing only franchi-sors. Today, the association represents more than 1,400 fran-chise systems worldwide, as well as counting among its members many franchisees and suppliers to the franchise community. In addition to expanding in the U.S., more than one-third of IFA members are based in international locations.

From the original goal of advancing franchising in the United States came the recognition that as franchising grew, ensuring best practices in franchise management was going to be important internationally as well. As the world’s oldest and largest franchise association, IFA has served for decades as a member of the World Franchise Council, an international organisation of franchising associations that are dedicated to advancing, enhancing, protecting and supporting best practices in franchising management around the world.

Early PioneersIFA was founded in Chicago in 1960 by a handful of franchise leaders led by William “Bill” Rosenberg, founder of Dunkin’ Donuts. Each person attending the inaugural gathering contributed $100 to help finance the start of the association. By the time these leaders had met, modern-day franchising had already begun to show its potential for changing the economic vitality of the U.S. by producing jobs, creating small businesses and supporting the rapid development of the middle class in the post-World War II economy. The widespread acceptance of branded products and services in the expanding economy was already providing significant benefits to consumers.

IFA’s founders realised that as franchising grew in impor-tance, challenges would undoubtedly arise, as this frequently occurs in any rapidly growing, emerging industry, and they anticipated that there would be a movement by the government to regulate franchise practices. Having a strong association that could educate legislators and other government officials about franchising and influence their ideas for a proper regulatory structure would be essential. From that single meeting, IFA came into being and has since then benefited franchisors, fran-chisees and consumers worldwide.

© Published and reproduced with kind permission by Global Legal Group Ltd, London

2 IFA’s Role Shaping the History and Future of Franchising

Franchise 2021

committee meetings and to be educated on national and interna-tional affairs and economic trends.

Through meetings arranged by IFA’s staff, association members meet with their elected officials in Congress to educate and inform them and the news media about the franchise model, the impact of regulatory changes and key issues facing fran-chising and small business.

IFA’s work at the grassroots level is equally important to the success of franchising. Through member-sponsored local Franchise Business Network meetings, the grassroots Franchise Action Network, and working with World Franchise Council member associations, IFA with its members and partners works to educate officials and the media, making the voice of fran-chising heard. IFA’s Annual Convention, Legal Symposium, Franchise Marketing and Technology Conference, and FRAN-GUARD, its comprehensive programme of franchise sales compliance, provide members with a wide range of program-ming to advance franchise management best practices.

As IFA looks forward to a more expansive future, it is important to reflect on the leadership and ideas that have made the franchise community what it is today. IFA looks forward to continue spreading the positive impacts of franchising across the globe.

Further InformationThe International Finance Association is located at 1900 K Street, NW, Suite 700, Washington, DC 20006. For any enqui-ries, please email [email protected] or call +1 202 662 0767.

rigorous course of study, the successful completion of examina-tions, and a proven level of contribution and support to fran-chising. More than 2,000 IFA members are engaged in the programme as CFEs and candidates.

Framework for FranchisingHeadquartered in Washington, D.C., IFA supports its member-ship with more than 30 professional staff led by the President and CEO Robert Cresanti, CFE. Guided by its Code of Ethics and Statement of Guiding Principles, IFA continues to provide a framework for developing and maintaining healthy, productive and mutually beneficial franchise relationships.

Keeping the performance of franchising strong requires a resolute presence on Capitol Hill and at the state and local level. Through its political action committee, FranPAC, IFA has raised millions of dollars in support of business-minded congressional candidates. With the leadership of IFA’s Legal-Legislative Committee, members of its legislative staff, professional consul-tants and the IFA membership at large, IFA has grown to be one of the major voices for free enterprise on Capitol Hill today.

Protecting FranchisingIn 1992, IFA began National Franchising Week, the brain-child of past chairman, U.S. Navy Rear Admiral Bernie Browning, the founder of General Business Services. In the ensuing years, National Franchising Week has evolved into the popular Franchise Action Network (FAN) Annual Meeting, formerly called the Public Affairs Conference, where each fall, hundreds of IFA members meet in Washington, D.C. to conduct

Celebrating 60 years of excellence, education and advocacy, the International Franchise Association is the world’s oldest and largest organisation representing franchising worldwide. IFA works through its government relations and public policy, media relations and educational programmes to protect, enhance and promote franchising. IFA members include franchise companies in over 300 different business format cate-gories, individual franchisees and companies that support the industry in marketing, law, technology and business development.

www.franchise.org


Franchise 2021

Chapter 2 3

The Role and Transformation of the bfa

British Franchise Association Emily Price QFP

Pip Wilkins QFP

Not all brands will achieve membership at first attempt which is why we have built a dedicated team at the bfa to support this journey. To join, we will be reviewing the franchise agree-ment, financial sustainability, franchisee support structures and looking for full and fair disclosure of information given to prospective franchisees. We take a partnership approach from the very first point of contact right throughout the application process to a brand becoming a bfa member.

Like anything in business, our standards do not stand still. They evolve and are strengthened as our sector matures and are based on a solid understanding of what is coming from interna-tional shores.

2) Representation

To be the authoritative voice of an industry, an association needs solid representation from all stakeholders, there truly is strength in numbers! The bfa has one-third of all UK franchisors in membership, a solid professional affiliate base including legal, banking, accountancy, specialist consultants and media and more recently has embarked on ensuring that the voice of fran-chisees from the grass roots of franchising are represented all the way up to Board level.

Anyone involved in franchising is a business professional and therefore should be a part of their professional body. If we are going to keep growing as an industry and ensure our industry remains the best it can be, we all need to engage, learn and develop.

3) Partnerships

In order for a partnership to be successful, it must be one of mutual benefit. As an association, we belong to four key profes-sional bodies that help us shape our standards and ensure the bfa is at the forefront as the leading educator in UK franchising. ■ World Franchise Council (WFC) The bfa is a founding member and one of 46 countries

that is represented by the WFC – with a role to promote, protect and support the growth and development of fran-chising internationally. The facilitation of collective understanding and best practice sharing on ethical fran-chising and association management worldwide means that through our engagement we are able to identify poten-tial legislative threats that could affect franchising in the UK and share best practice with our international peers on solutions for franchising as a whole. Since being estab-lished as a collective group the WFC has:

Franchising in the UK has grown year on year for more than 20 years. The industry now contributes £17.2 billion per annum to UK GDP and employs more than 710,000 people. With over 935 business format franchise systems operating in multiple sectors, franchising has something to offer everyone.

The Role of the bfaSince 1977 the British Franchise Association (bfa) has been setting and influencing standards for UK franchising. As one of the largest self-regulatory franchising associations in the world, the bfa is held in high regard globally within the industry and by its peers. We do not seek to simply transact with the industry but to influence positive change and build strong and trusted rela-tionships with our members who pride themselves on operating to the highest standards as their networks grow.

As with all other industry trade associations, we play an important role in the development and growth of our sector. Our role is to provide education and training to members, to promote the sector, speak as the voice for the industry when it comes to regulation and new legislation and promote best prac-tice and networking opportunities.

What Makes the bfa Franchising’s Trusted Partner?With increased competition from franchise associations to partner with, it is important to look at why the bfa is the trusted partner in the UK and what sets a good association apart from another one.

1) Standards

Our standards were the basis on which we were formed and still form our ‘why’ today. More than 40 years ago, eight founder franchisors sought to differentiate themselves in franchising as ethical operators. Since then, we have grown and developed our standards with the bfa brand now seen as the kite-mark repre-senting ethics and credibility within the franchise sector both nationally and internationally.

Knowing that the industry’s standards body has examined a business’s franchise model and confirmed that it operates ethi-cally, for the sustainable benefit of its franchisees, is a powerful tool for recruiting prospects and growing a successful network.

Our compliance function and the work it does to accredit brands against a strict set of criteria serves one of our core purposes, to protect UK franchising and increase the influence of our sector. With many associations, you can simply pay to join, and you are in – that is far from the case with the bfa, which is precisely why franchisors take such pride in being able to display the bfa brand alongside their own.


4 The Role and Transformation of the bfa

Franchise 2021

shared goal: to advance their industry. No one has all the answers but by engaging in the educational opportunities and networking, members can expand their knowledge and learn from others. As a sector, I believe that franchising does this better than most. Its unique in the sense that you can discuss your issues and challenges with brands from other sectors as well as your own.

5) Innovation

To stay as one of the leading franchise associations in the world, it is key that we remain relevant and keep innovating to ensure we are current and offering the right levels of support and services to our members. My co-author, Emily Price, will be sharing operationally how we have diversified.

Concluding ThoughtsAs an association, ensuring we have thorough representation and the right partnerships is vital to our success and of fran-chising overall.

The major banks involved in UK franchising all respect our membership logo. They understand the accreditation process, the quality needed to gain it, and look more favourably on a fran-chise which has already passed checks conducted by the bfa.

The media recognise the bfa as the voice of franchising in the UK, with frequent requests for editorial content and advice, as well as significant PR opportunities for our members. They work with the association because they know that we represent the best to be found in franchising – and understand how to avoid the worst.

Our history, evolution and standards all make the bfa and its members stand out in a growing and competitive marketplace. The greatest threat to membership growth is a lack of awareness about the benefits an association can offer with the younger generations. Building that awareness is one we are already embarking on with campaigns focused on ‘The Leaders of Tomorrow’ and a growing social presence across channels.

Running a business is a full-time job and requires many hours of work and dedication so joining an association may seem like a waste of time. But if you do not get involved, and your industry suffers, so will you.

I am a believer that you will get more out of being involved in an association than you will ever give to an association. For me personally, working with the partnership organisations I mentioned earlier, I know that my skills, my professionalism, my network and my awareness of industry trends and developments all help me add value to our members and the future members.

I encourage you to investigate joining your professional or trade association. Do your research and make sure it is a cred-ible one that truly offers what it says it does – it will be a step in the right direction!

From Caterpillar to Butterfly – Transforming the bfaPip has explained the ‘what’ and the ‘why’ of the bfa and, it is fair to say, that has remained consistent pretty much since its inception. However, what we know is that the membership is changing and the needs of the franchise industry are changing and with change comes the need for us to adapt. In this section, I will be dealing with the ‘how’ we continue to deliver the ‘what’ and ‘why’ in a meaningful way to our membership. That may sound simple, but in our case, there are some complexities to navigate. Firstly, when embarking on the project we needed to really understand what sticking points our members and pros-pects were facing so we could head up our change journey with those challenges in mind.

■ SecuredacommonpositiononproposalsforaModelLaw on franchising.

■ Reached consensus on the principles that should befollowed by franchise associations when developing their Codes of Ethics.

■ WrittenanumberofJointDeclarationstoGovernmentrepresentatives in select countries to prevent the formation of regulations which could have a direct or indirect implication for the franchise sector.

■ Recognisedtheneedforsingleandgenuinerepresent-atives from only one national association per Country.

The operations of the WFC are conducted by a series of Vice Secretariats which are held by Full Members from national associations. Functions such as Communications, Information, Legal and Finance are rotated between Countries where associations have the resource and capacity to fill the function. The bfa currently holds the Vice Secretariat for Finance which is a position it has held for a number of years.

■ European Franchise Federation (EFF) The EFF is another body for franchise associations but

focused on Europe. The good thing is membership is based on geographic location rather than whether we are in or out of the EU. The main aim of the Federation is lobbying and to be the single authoritative voice for the promotion of franchising in Europe with the European Commission and National Governments. Members of the EFF put forward for election franchise entrepreneurs to be elected to the Board of Directors. As one of the largest franchise associations in Europe, the bfa currently has both a franchisor and franchisee represented on the Board who are very active alongside myself in supporting the growth and develop of the Federations and its standards.

All EFF members, including ourselves, have had to build their standards and reputation on the principles of the European Code of Ethics for Franchising as well as set up detailed accreditation criteria and their own extensions and interpretation of the Code in their Country.

■ Confederation of British Industry (CBI) The CBI represents 190,000 businesses of every size and

sector for every region of the UK so has a loud and influ-ential voice to campaign for real changes to the policies that matter most to business. Through collaboration with its members and sharing information and best practice, the reach the CBI has is further than any one business could have alone which is why we continue to be an active member.

■ Trade Association Forum (TAF) This organisation is an association for trade associa-

tions with direct supporting links to the Department for Business, Energy and Industrial Strategy (BEIS), making it a great partner for the bfa. The overarching services are to support trade associations with the day-to-day operations, but they also work hard to promote the great things asso-ciations are doing to Government and the wider public.

All of these relationships assist the bfa with ensuring that we have an ear to the ground in both business and franchising, nationally and internationally. This means we can keep our own members abreast of the things they need to know and protect our industry from any threats that could affect franchising.

4) Community Collaboration

All trade associations encourage the industry and the individuals within it to get together because they have a common interest and


5British Franchise Association

Franchise 2021

was no different in this, we saw the pandemic as an opportunity to show the industry what the bfa can do and what it means to be represented and supported by their association. Through adver-sity can come some great opportunity and it was this approach we took to accelerating our change project and propelling the transformation to prove our worth. The past five months have, in our minds, solidified the pace of which the association will need to operate in the future and the clarity with which we need to communicate to our customers. It is tough trying to break historical impressions but we do feel confident that the bfa is now well on its way to evolving into a new association, with a razor purpose that extends beyond standards and into every franchisor operation. The vision now is simple ‘to be your trusted partner in franchising’. This is something that aligns hugely with the values of the bfa and its teams and every team has undergone a review to ensure that the mechanisms reside to facilitate trusted partnerships.

1) Compliance

Whilst standards are one of the biggest reasons franchisors undergo our accreditation to become a member, they can also become one of the biggest barriers to some brands joining. This team has been working hard to ensure that the process to join can be one of collaboration, partnership and support. It is crit-ical for the success of the franchise industry that franchisors do not feel intimidated by the process. We want to ensure the opportunity to review and strengthen existing processes is viewed as a positive step. Committing to operate as an ethical franchisor and maintaining that relationship is a big statement to make to a network and one which we know increases brand value in the long run. Once a franchise has joined, there are some important ongoing mechanisms to help them navigate the ups and downs of franchising and we are proud to now include a franchisee satisfaction survey as one of our tools to identify improvement areas and work in partnership with the franchisor to help influence their network’s success. In addition to this, some significant updates are being made to dispute and medi-ation processes to try and help open lines of communication on issues before they have gone too far to resolve informally between franchisee and franchisor.

2) Brand & Innovation

This team is the one that produces significant project platforms for our members to obtain exposure and for franchise promo-tion at large. The coming 12–24 months will see growth in the support we offer here. In recent times we have been able to facili-tate collective digital advertising campaigns where the franchisor members can contribute to a subsidised bfa-run PR campaign to target prospect franchisees and help educate franchising to populations that may be well suited but otherwise would not have known about the opportunity. Go-local provided a way to educate franchises as being locally run businesses under our #nationallyknownlocallyowned campaign, whereas our fran-chising after redundancy campaign has allowed us to highlight the great examples of people that have chosen franchising after redundancy under our #keepcalm&considerfranchising banner. The bfa puts considerable effort into facilitating high-quality content generation that is low cost and provides a great return to those that engage. We realise that in order to expand the recog-nition and reach of franchising we need to be in a position to talk to many audiences and resonate with the circumstances that may mean they look for that change of direction in life.

The ChallengeAfter many years of male-dominated leadership in a tradition-ally male-dominated sector, the association developed a reputa-tion for being exactly that. This also extended to a perception that the bfa was exclusive, overpriced and lacking in value. For existing members, most cited the bfa accreditation and logo as the main benefit to their membership, but only a small proportion of members actively engaged with the bfa to realise the true value that the partnership could bring to them. Pip and I both knew that there was a lot of work to be done and as they say, percep-tion is reality, so we set about the journey to create a new reality!

The Changing CustomerIn recent years, franchising has become a very popular option for business growth and we are seeing trends in several areas; there is an increasing number of corporate businesses looking to grow through franchising and often this is not with green-field sites but with converting large percentages of their company-owned estate. In order to remain relevant to these businesses, the bfa needs to show that they can impart signif-icant knowledge and experience that will support them in the world of franchising and connect them to the critical informa-tion and people that will aid their development. We have found that there can be mindset challenges that are experienced in corporate business structures when they decide to franchise as the franchise partner may not be seen as a partner but almost an extended member of the management team. This is where the bfa’s Qualified Franchise Professional programme and academy products can be extremely beneficial for the upskilling of the team supporting the expansion. In addition to adopting the franchisor-franchisee relationship mindset, we have found that for the larger businesses often there is a lot more at risk in terms of existing brand value. For that reason, we see that representa-tion and Government influence are very attractive reasons for them to want to be accredited and join.

On the flip-side, there has also been a huge uplift in the number of low-cost, lifestyle franchise solutions where people are operating a great sole trader business and wish to expand on that to service demand and grow organically. For this group of franchisors, it is often the case that they are franchised on a tight budget and sometimes that can cause issues in terms of them falling into low-cost franchise consultancy traps, of which a few do exist. The priority for this population of franchisor is to ensure we can be accessible at critical points where the bfa’s standards and support can make the biggest impact to their future success. Thereafter, we know that extending that support into the fran-chisee populations can be invaluable, where the association can leverage the collective power of the network to provide training and networking experiences to help motivate and connect the franchisee owners to improve the running of their businesses.

As well as the evolving franchisor profiles, we have seen a change in the attitudes and requirements from existing members too. The association needs to ensure that it is absolutely on the ground supporting the customer, but at the same time operates a helicopter view high enough to navigate threats and influence decision making where needed to ensure the franchise industry remains a strong and thriving place to do business.

Becoming a Trusted PartnerIt is fair to say that 2020 will likely go down in history as a year that the world stopped, took stock and acted. Although some sectors were inundated with increasing demand, the majority had to deal with the shock reality that in order to weather the COVID-19 storm there was a serious pivot to be done. The bfa


6 The Role and Transformation of the bfa

Franchise 2021

The second part to engagement is our evolving member-ship community. For many years we policed standards along-side our affiliate community and existed as a franchisor-only association. Today, we are looking to represent the entire fran-chising community, and for us that means the thousands of franchisees alongside the hundreds of franchisors. We know that in order to have true influence, the voices we represent must include those at the coalface of franchising. Moving to free franchisee membership for all franchisees of our accred-ited members has been a big step in taking us on this journey and one we are excited to see grow. The development of fran-chisee membership follows our previous development and inter-national first when we introduced the UK Developer category in 2018 to support franchisors looking to expand into the UK.

Ensuring Sustainable Growth for the FutureTo ensure we could deliver sustainable improvements to the membership we needed to start reviewing the operational framework for the business. We were asking ourselves if the processes were fit for purpose, efficient and importantly, fit for our future customers, products and services. We have invested in new central systems and are developing both our data insights and public-facing site as a monthly ongoing project to ensure we do not stagnate. Late summer will see us launch a new member area online so that we can service information quicker and create bespoke dashboard and recommendations to our customers.

There are a number of new projects that are launching, and with every scoping document we ask ourselves, will this help us to become a trusted partner, a leading educator and support with the ongoing ‘why’ of the bfa, the standards. The company culture is undergoing a complete overhaul and the onboarding, training, processes and language being used internally will reflect that of the same that we will use to build trusted relation-ships with our customers and prospects. The search for our new office is an important milestone and will see us move to a loca-tion in 2021 that is much more accessible for the membership. It will become a franchise location with heart, and we hope that people will feel inspired and energised by their experiences with us. The bfa’s new home will be one that invites members as family and will aim to provide significant value on every visit.

The journey we are now on is one of positivity, energy and passion for making franchising a much better place to be.

Aside from public awareness, it is also critical that the bfa can build strong relationships with educators, media and influencers on the subject of franchising. This is where some of the larger projects take force. The bfa HSBC British Franchise Awards and the annual British Franchising Survey are big hitters in the PR space and do provide us with substantive evidence to represent the industry. We look to ensure that economic trends and Government agendas can be acknowledged when plan-ning these campaigns and use this as a great platform to secure significant coverage for our membership and the industry. The combined coverage of the 2019 award programme alone reached over 74 million people.

As we progress into our next phase of development at the bfa, we will be looking to build additional partnerships and become a lot more visible. There has been a lot of work already done to lay the foundations for additional exposure and we will be expanding the benefit portfolio across a number of channels to support the digital revolution. This will provide the framework needed to ensure we can attract and effectively educate people that are considering and growing in franchising.

3) Customer Engagement

To become the trusted partner in franchising, firstly we need to earn that trust, and this meant reconnecting with our communi-ties and showing true value with great intention. Gone are the days that people wait for a letter to arrive in the post for their latest updates. We have undergone a significant restructure of membership communications to ensure that the messages are clear, consistent and considered. The overall communication structure sees a weekly email, a bespoke member newsletter to promote membership activities and an external-facing news-letter which can educate and encourage people to consider fran-chising. Online forums have been designed to promote free advice and guidance services along with the opportunity to seek member-to-member opinion. The senior team are proactively building relationships on the front line to ensure there is a solid understanding of the member requirements of today, and we are all having a lot more conversations. Overall, being more available and approachable to our members has to be key. The customer-centric environment we are creating is at the heart of every team meeting, project and development we do.


7

Franchise 2021

British Franchise Association

Pip Wilkins QFP is the Chief Executive of the British Franchise Association (bfa). With more than 20 years’ experience in the franchise sector, Pip has worked her way up within the Association, gaining insight from all areas of the business and the franchise industry. She is well-known and highly regarded in franchising for her dedication and depth of knowledge. Pip regularly speaks at conferences and seminars both domestically and internationally, as well as writing on franchising matters for national, local and franchising trade press. Pip is also a regular judge for the annual bfa HSBC Franchise Awards, the Franchise Marketing Awards and Global Franchise Awards.Pip represents the UK at both the European Franchise Federation (EFF) and World Franchise Council (WFC). The bfa has grown to be one of the largest franchise associations in Europe, and one of the most successful associations in the world.

British Franchise AssociationMilton Park, 85f Park Drive, Milton Abingdon OX14 4RY United Kingdom

Tel: +44 1235 820 470Email: [email protected]: www.thebfa.org

Emily Price QFP is the Chief Operating Officer at the British Franchise Association (bfa). She worked alongside the Senior Leadership Team in HR at Barclaycard on global business transformation projects before joining the Association in 2013. Emily is responsible for the imple-mentation of business strategies, plans and processes at the bfa and has had detailed input into the strategic direction of the Association.Emily is a passionate advocate of great leadership, people development and franchising. She regularly writes on franchising matters both regionally and nationally and launched the bfa’s ‘Future is Franchising’ series of articles to provide advice and guidance to franchisors at all levels of growth. Emily was instrumental in developing a UK Developer Category for businesses looking to bring their franchise concepts into the UK market.Emily is highly respected in franchising for her depth of knowledge, experience and delivery. She is frequently a speaker at the National Franchise Exhibitions and other major events in the UK.

British Franchise AssociationMilton Park, 85f Park Drive, Milton Abingdon OX14 4RY United Kingdom

Tel: +44 1235 820 470Email: [email protected]: www.thebfa.org

The British Franchise Association is a not-for-profit self-regulatory body for UK franchising and has been effectively representing to a high standard since 1977. If you are keen to find out more about how they can support you with your franchise development in the UK you can visit www.thebfa.org or email [email protected] for more information.

www.thebfa.org


Franchise 2021

Chapter 38

Delivering Growth – The Third Way

Freeths LLP Iain Bowler

is also worth noting that failure rates for franchises also remain very low, with recent statistics in the UK showing a failure rate of less than 1% per annum.

By way of example, I worked with a high-end fashion retailer whose operations in Europe were all corporately owned. In pursuit of faster growth than their traditional core markets were able to deliver, they decided they wanted to expand into 11 new countries by the end of the new financial year. It was agreed that a franchise model gave them the best opportunity to achieve that goal, and by the end of the year, working side-by-side with the brand owner’s commercial, financial and legal teams, we created a franchise system, produced all the necessary documents (subject to English law), had the agreements “local-ised” so they were compliant with the nuances of local law in all 11 new territories, and helped develop the operating manual in conjunction with a franchise consultant we had introduced. The bottom line: new stores opened in all 11 countries by the end of the financial year.

So, if you are looking for growth and are considering fran-chising for the first time, or if you are already a franchisor but you are considering expanding your system internationally and you are looking for information about key issues relevant to franchising outside of your domestic market – read on! But this guide is also designed for the corporate business owner looking for information about franchising in its home market as it looks to expand using the “Third Way”.

The high street in many of the world’s leading economies has become even more of a bloodbath as a result of the global coronavirus pandemic. Some sectors, in particular tourism, travel, food and beverage and retail are facing potentially cata-strophic challenges, with sales having plummeted as a result of global lockdowns, reduced footfall as a result of ongoing social distancing measures and minuscule margins as businesses around the world try to encourage consumers to start spending again.

Nevertheless, the requirement for growth is relentless, and brands are adopting new strategies to increase the rate of growth through the adoption of new technologies, the launch of new applications and the development of new omni-channel distri-bution channels. Brands are also looking to accelerate growth through multi-unit franchising or joint venturing and through developing new relationships with credible local partners. Local partners who are looking for opportunities to work their existing infrastructure and assets harder will commit to multiple-unit franchise development programmes with established brands, and also take on additional non-competing brands to adopt a multi-brand strategy in their location.

It is also an undisputable fact that global markets are continuing to integrate, and the World Wide Web and social

For decades, captains of industry, faced with the need to grow their businesses, have adopted a binary approach – to grow organically or through mergers and acquisitions. There are pros and cons to both these methods. Organic growth gives the busi-ness the greatest degree of control over the newly added opera-tions but it is usually slow, resource-heavy and requires signif-icant amounts of investment in terms of management time, effort and cash. Expanding overseas through company-owned and operated units also brings with it additional risks in terms of operating under a different legal and tax system, cultural and language differences, risks associated with extending the supply chain and employment and property ownership issues, amongst others. Growth by way of acquisition, while having the imme-diate attraction of adding new locations and additional revenues, can also be a risky proposition. Implementing the deal, ensuring you are actually getting what you think you are buying and the cost of funding the acquisition can be a major distraction and a drain on resources. Once the acquisition has been completed, integrating the acquired business into your existing operations – possibly having to rely on the seller to provide you with transi-tional services support for a period after completion – sometimes rationalising units that have been acquired if they are unprofit-able or where they compete with an existing corporately owned unit, integrating centralised functions, and possibly running a redundancy programme, all require a significant amount of management time, effort and money. And during this process you also cannot take your eye off the core business, otherwise you could find that instead of adding value to the original busi-ness, your acquisition initially amounts to 1+1=1½!

But there is also a third way. Balancing the need for growth with the need to mitigate some of these corporate risks some-times leads businesses that have not previously been franchised to consider whether franchising can give them the opportu-nity for controlled affordable growth. Franchising is a proven way of growing your business, whether you are an existing fran-chisor or not. According to the research by the British Franchise Association and National Westminster Bank, franchising in the UK contributes some £17.2 billion to the UK economy, an increase of more than 45% since 2008.

Franchising offers brand owners an asset-light way to grow their business by working with carefully selected commer-cial partners who use their own people, property and capital resources to open new units using the franchisor’s brand, trade mark and operating system. Over the last half-century, fran-chising has been shown to be a very successful business model in many parts of the world and in almost every industry sector, from retail to restaurants and coffee shops, business-to-business services, consumer services, professional services, home health-care, educational services, lifestyle businesses and much more. It


9Freeths LLP

Franchise 2021

joint venture partner or master franchisee), the rate of growth – in terms of new unit openings – will be exponentially faster than under a direct franchise model.

Let us now imagine you are the General Counsel of a well-known fashion retailer, “Xepit” (pronounced Zepit), which has 35 company-owned stores in the south of England. Xepit also has three third-party-owned stores operating under licence at different UK airports. Recently, Xepit’s owner Ric Coull appointed a former investment banker as Xepit’s International Development Director to oversee the development of the Xepit brand so that he will be able to realise some of the equity in the Xepit brand in a few years’ time. Ric Coull is in his late 40s, and having spent the last 15 years building the Xepit brand up from a market stall in Covent Garden, London, his mind is turning to the inevitable question of how he will cash in on the value of the brand he has created.

Earlier in the year, Ric attended a franchise conference presented by his lawyers and a private equity house active in the franchise sector, where he learned that the M&A market for successful and well-managed franchise systems is still strong. Ric has also read about the acquisition by private equity firm Apollo Global Management of Chuck E. Cheese’s restaurants in the US for $1.3 billion, the acquisition by the Los Angeles-based Levine Leichtman of the Caring Brands International busi-ness, including Bluebird Care in the UK and Ireland, Interim Healthcare in theUSandJustBetterCare inAustralia,and isalso aware of a number of other recent transactions where fran-chised businesses have been bought by private equity businesses and he is keen to expand the business internationally so it will be a more attractive proposition to a private equity buyer or a large fashion house looking to consolidate modern, fashionable brands into its collection.

You are in your office. The phone rings and the International Development Director asks if you have a minute. The Development Director explains that Ric thinks the Xepit brand could be rolled out to other parts of the UK, and that the brand will also go down really well in a number of European coun-tries. He tells you that he has been researching countries where franchising is a recognised method of business expansion. He talks about rapid growth rates amongst franchise systems over the last few years in Brazil, Mexico, India, China, and South East Asia. He talks about the importance of market penetra-tion and about the need to build the business both in the UK and internationally rapidly over the next three to five years so it will be attractive to a potential buyer. Then, just as you think your head is about to explode, he also mentions that he has a vision for introducing Xepit brand concessions into a number of leading department stores in the UK, France and Germany under a series of brand licensing deals.

You are excited. You are impressed by the vision for the growth of the business and you are curious what this might mean for you and the management team, but first and foremost you are asking yourself: “How am I going to find out what we need to do to establish a franchise system and concession arrangements in the UK and in multiple countries outside the UK in the next 24 hours?”

Welcome to International Comparative Legal Guide – Franchise 2021. This publication has been compiled to give you the first-line response to this question. The content has been provided by lawyers and industry specialists in each country who specialise in franchise law and brand licensing, and who are familiar with the needs of business people who want to gain an understanding of the key regulatory, legal and practical considerations that must be considered when contemplating an expansion strategy using a franchise system.

But do not be lulled into a false sense of security. This publi-cation will not make you an instant expert in the laws and

media platforms provide even more powerful tools for busi-nesses large and small to reach new customers. As a result, new and relatively underdeveloped markets are being targeted by businesses that are finding their established markets saturated and increasingly stagnant in terms of growth. As a result, we are also seeing an emergence in the franchising world of online “pure play” businesses, facilitated by the power of the internet and social media platforms to reach millions of potential customers and by consumer demand for high levels of conve-nience and customer service.

Expansion, whether domestic or international, should be carefully planned; it should be strategic – carried out with the aim of delivering a pre-defined goal, and with the approach being tailored to deliver your commercial objectives. In partic-ular, international expansion, even done right, is not easy, and requires investment. Take Starbucks’ expansion into China as an example. Having entered the Chinese market in 1994, Starbucks encountered nearly five loss-making years while it introduced the concept of coffee and the café culture to the Chinese people and built the brand’s reputation. However, by this year (2020) China will have become Starbucks’ largest market, eclipsing the US in terms of numbers of units, with a new unit opening in China every day! Starbucks has achieved this spectacular rate of growth through the establishment of three regional franchise joint ventures.

One of the myths that fuels the belief that expansion through franchising should be cheap is the statement that franchising uses other people’s (the franchisee’s) capital. The truth of the matter is somewhat different, at least initially for any business that is considering franchising for the first time. It is undoubt-edly the case that once the franchise system has been set up and has become established, leverage enables the franchisor to repli-cate successful franchise units time and time again, at relatively little cost to the franchisor. However, the costs of setting up the franchise system in the first place, and the additional costs of adapting an existing domestic franchise system so that it can be rolled out and successfully replicated in new geographic loca-tions, should not be underestimated. Moreover, the importance of getting the system right from the outset cannot be overem-phasised. The success of a franchise system depends on the franchisor providing franchisees with a proven and successful business model. Investing in developing the system, including a workable and palatable (to a franchisee) set of franchise docu-ments, will therefore repay you many times over.

Consequently, the first piece of advice I give to any client considering international expansion is: make sure your expectations are realistic.

Having established a realistic set of expectations, having then put those expectations into a deliverable programme (timetable) and having identified, as far as possible, the resources (human, capital, infrastructure and other) you can begin to think about executing your expansion plan. Some refer to this stage as eval-uation, others call it due diligence. Whatever your preferred language, the message is always the same: Proper Planning and Preparation Prevents Poor Performance – the “6 Ps”.

Part of your evaluation will include an analysis of your supply chain, and how the supply chain can be expanded to support multiple franchisees in multiple countries. Another important aspect of your evaluation will be to balance the amount of control you want to retain over the franchise network in a particular country against the rate of growth you want to achieve. There is an inverse relationship between control and rate of growth – the greater the amount of control you retain (for example, by entering into direct franchises with your franchisees), the slower the rate of growth; whereas if you are prepared to cede more control to another party (be that an area or regional developer, a


10 Delivering Growth – The Third Way

Franchise 2021

What this publication will do is enable you to see, at a glance, what you need to know about building a franchise system for the first time or taking your franchise system into other coun-tries. You can use this publication to get a well-informed insight into the questions you will undoubtedly have when you decide to create a franchise system or when you take your existing system overseas. The questions have been formulated based on actual experience of advising clients in relation to international expansion programmes, and have been sense-checked by asking a number of existing international franchisors about the issues they have faced and the specific questions they wanted answers to when they were considering entering a new territory for the first time.

You can also read across the same question in relation to a number of different countries to produce your own specific matrix of key issues, by country, which can be used as a briefing tool and as a checklist for your discussions with your external legal, tax and accounting advisors.

This publication is an essential part of your “6 Ps” approach to successfully planning for and executing your business’s expan-sion strategy. It will enable you to be better informed, to antic-ipate issues, scope your requirements and so be better prepared, and it will enable you to manage the external resources you will need in an efficient and cost-effective way.

practice of international franchising. Franchising, as a body of law itself, does not exist in many countries, including the UK. Even in those countries that do have specific franchise laws (like the US), a franchising code of practice (like Australia), or rela-tionship laws that govern the rights and responsibilities that franchisors and franchisees owe to one another, franchising as a legal concept involves a number of other disciplines that have a material impact on the way you will structure your franchise system in any given country. Franchising is, in essence, a combi-nation of regulatory compliance (sometimes), contract law, tax structuring, intellectual property law (in the form of trade mark protection and brand licensing), real estate and competition law issues, with a bit of employment law, corporate law, data privacy compliance and cyber risk (and more) thrown in for good measure. On top of this, you need to overlay country-specific mandatory legal requirements, a recognition of the difference between civil law and common law jurisdictions, and cultural and business environmental considerations.

As General Counsel of Xepit Retail, you may already be familiar to some degree with a number of these issues, but it is almost certainly the case that you will need to consult local legal counsel who advise on structural issues relating to the set-up of the franchise system and the review and “localisation” of the legal documents in their territory.


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Franchise 2021

Freeths LLP

Iain Bowler qualified in 1988 and specialised in M&A, stock exchange and complex commercial and joint venture work. Between 1998 and 2002, Iain was Director of Corporate Finance at a corporate industrial developer headquartered in the UK and USA. He joined DLA Piper as a Partner in 2002 and was global Co-Chair of the Commercial Contracts and Franchise and Distribution Groups before joining Freeths as Head of the Commercial and Franchise Group in 2019.Iain’s work includes commercial transactions of all descriptions, including supply chain management, procurement of goods and services, outsourcing, manufacturing, logistics, consultancy and services agreements, direct sale, agency, franchise, distribution, brand licensing, e-commerce and international trade. Iain is ranked as a “leading individual” for franchise work in The Legal 500 and Chambers, is listed in the global Who’s Who Legal for franchise work and is an Acritas™ Star Lawyer. Iain is an Affiliate Member of the British Franchise Association.

Freeths LLP1 Vine StreetMayfairLondon, W1J 0AHUnited Kingdom

Tel: +44 845 030 5767Email: [email protected]: www.freeths.co.uk

Freeths LLP is a top-50, full-service commercial law firm with 13 offices across the UK. One of the UK’s fastest-growing law firms, Freeths has over 1,000 staff and turnover in the last financial year in excess of £100 million. The Legal 500 and Chambers legal directories consistently rank Freeths’ lawyers in their top tiers. We have franchise experts in a number of our offices advising clients on all manner of franchise and distribu-tion contracts. We have extensive experience in structuring, negotiating and documenting franchise transactions in the UK and internationally, including multinational master franchise, area and regional developer and area representative arrangements, joint ventures and other distribution and brand licensing relationships. Our clients come from all sectors and

cover a broad spectrum of size and experience, from entrepreneurs and companies that are establishing new programmes, to large franchisors, manufacturers and distributors.

www.freeths.co.uk


Franchise 2021

Chapter 412

Australia

DC Strategy Lawyers Nina Rossi

Australia

Aspects of the Corporations Act 2001 (Cth) may also impact on the manner by which a franchisor operates in Australia and how it is structured.

1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a “franchisee” for purposes of any franchise disclosure or registration laws?

This depends upon how the franchisor wishes to structure its Australian operations. A sole franchisee in Australia can simply be a franchisee, however the franchisor will then be required to be compliant with Australian law in regard to the operation and management of the Australian franchise. Alternatively, the franchisor could offer a master franchisee agreement which in turn will cause the master franchisee to be responsible for all matters within Australia which relate to the territory granted, including compliance and any additional sub-franchisees.

1.4 Are there any registration requirements relating to the franchise system?

There is no requirement to register a franchise system in the Code, therefore a franchise does not need to be ‘registered’ in Australia. That said, any business purporting to be a franchise must comply with the terms of the Code in all respects.

1.5 Are there mandatory pre-sale disclosure obligations?

There are certain documents a franchisor must give you before you enter a franchise agreement.

As soon as you show a genuine interest in a franchise, franchisors must tell you about the risks and rewards of franchising by giving you as soon as practicable an Information Statement (https://www.accc.gov.au/publications/franchising-information-statement) (in the form set out in the Code).

The franchisor must also give you the documents listed below at least 14 days before you sign an agreement or make a non-re-fundable payment. This means you have at least 14 days to read them, you can take more time if you need it.■ The FranchisingCode ofConduct (https://www.legisla-

tion.gov.au/Details/F2020C00511) is an industry code that all franchisors and franchisees have to follow. The franchisor has to give you a copy of the Code.

■ A disclosure document is a document with informationabout the franchise. It should include information from the franchisor to help the franchisee make a reasonably

1 Relevant Legislation and Rules Governing Franchise Transactions

1.1 What is the legal definition of a franchise?

Franchising is a method of operation used by companies to distribute products or services. The company (the franchisor) grants to the operator (the franchisee) the right to sell a product or service and to operate a business along the lines developed by the franchisor and use the franchisor’s trade name or other designation.

Ideally, a franchise is a continuing and supportive relationship between the parties to work for the benefit of both. But there are degrees of relationship and of success.

The right or privilege granted is called the franchise and it may include the right to sell the parent company’s products and services, use its name or any other intellectual property it has developed and uses, adopt its methods and/or use designs, imagery and shop layout/presentation/collateral. A franchise may include only some of these rights.

1.2 What laws regulate the offer and sale of franchises?

There are laws of general application at both the Commonwealth and state level which impact on franchises.

At the Commonwealth level, attention must be paid to the provisions contained in the Competition and Consumer Act 2010 (Cth) (CCA) noting the need to avoid unacceptable behaviour, such as deceptive and misleading conduct in the sale process. Also contained in the Competition and Consumer Regulations 2014 (Cth), which support the CCA, is the Franchising Code of Conduct (the Code), which goes to the heart of the franchise issue process and compliance by franchisors with disclosure obligations.

Supervision and oversight of the Code compliance sits with the Australian Competition and Consumer Commission (ACCC). It is charged to ensure that the provision of appro-priate and sufficient information to enable franchisees to make informed decisions is provided and that there is ongoing good behaviour and adherence to the Code. The ACCC can issue penalty notices to a fixed amount per event and bring prosecu-tions before courts to seek further redress.

At the state level there are laws providing standards in regard to the advertising of businesses, and processes for a business sale (franchise turnover or corporate unit sales). There may be state disclosure requirements on prior business performance and cooling-off rights, as well as state laws which also impact upon consumer rights.


13DC Strategy Lawyers

Franchise 2021

A ‘materially relevant fact’ is a key piece of information about a franchisor or its franchise system, which could have an effect on a franchisee’s business. Materially relevant facts include:■ Changes in majority ownership or control of the fran-

chisor, franchise system, or an associate of the franchisor.■ Certaincourtproceedingsorjudgmentsagainstthefran-

chisor or one of its directors.■ A change in the intellectual property, or ownership or

control of the intellectual property, that is material to the franchise system.

If your disclosure document does not include a materially rele-vant fact, you must tell a franchisee or prospective franchisee about it, in writing, within a reasonable time (but not more than 14 days) after you become aware of it.

Further to the obligations surrounding the disclosure docu-ment, a franchisor or master franchisee must also, by the end of three months from the end of the financial year, obtain and provide to franchisees an audit of any marketing fund that is receiving funds. An exemption is available if, by formal resolu-tion of at least 75% of franchisees, it is agreed to waive the obli-gation to conduct an audit of the marketing fund.

1.8 What are the consequences of not complying with mandatory pre-sale disclosure obligations?

There are strict disclosure obligations of a franchisor under the Code. A failure to meet the disclosure obligations under the Code may mean that the franchisee may be able to ‘cancel’ your franchise agreement, with limited recourse then available to the franchisor. Further, there may be financial penalties imposed by the ACCC for non-compliance.

1.9 Are there any other requirements that must be met before a franchise may be offered or sold?

Buying a franchise means you are buying the rights to run a business under an already established brand name. Often these rights are subject to conditions that are set out in a franchise agreement and any agreements that are advised as being related including licences for the use of intellectual property and leases.

Before you buy a franchise, consider the same issues as you would if you were purchasing or starting any other business. Do your research and understand how it works. Also, consider the issues specific to franchises, such as what happens if the fran-chise or franchisor fails.

Once you enter into a franchise agreement, you are legally committing to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals.

If your franchise agreement is a standard form agreement, you should also consider if unfair contract term laws, as prescribed within the CCA, apply. A standard form contract is one that has been prepared by the other party and you have little opportunity to negotiate the terms. The ACCC website has more informa-tion on unfair contract terms and buying a franchise.

1.10 Is membership of any national franchise association mandatory or commercially advisable?

Membership of the Franchise Council of Australia is volun-tary, and open to any organisation or individual involved in the franchise sector, including franchisees, franchisors, lawyers, accountants, banks, consultants, academics, publishers, etc.

informed decision about whether to buy the franchise. Certain information must be included even if it might make someone decide not to buy the franchise.

■ Thefranchiseagreement(initsfinalform).When reading these documents and getting independent

advice look out for:■ Any supply restrictions on where you can buy essential

goods for your franchise; for example, coffee beans for a café franchise.

■ Thepurchasepriceofthefranchise(thefranchisefee)andwhat it costs you to run the franchise (wages, electricity, rent and others).

Franchisees are also entitled to withdraw from the franchise within seven days of signing the documentation and if such a withdrawal occurs, monies are generally refunded minus reason-able costs incurred.

1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?

Yes; however, it is then the master franchisee who is responsible for ensuring that all documents are updated at the appropriate intervals and in essence walks in the shoes of the franchisor in regard to the sub-franchisee.

1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?

Yes, the disclosure document is prescribed by the Code. A fran-chisor or master franchisee is then required under the Code to update the disclosure document within four months of the end of each financial year, i.e. by 31 October, unless the company in question has a special ruling from the Australian Securities and Investment Commission (ASIC) to amend the financial year dates.

However, you are not required to update your disclosure document if you did not enter into more than one franchise agreement during the last financial year (including transferring, renewing or extending a franchise agreement) and you do not intend to enter into another agreement in the following finan-cial year (the disclosure exemption).

The disclosure exemption will cease to apply if a franchisee requests a copy of your disclosure document (see below). If a franchisee requests a disclosure document in these circum-stances, you must update the disclosure document so that it reflects the position of the franchise as at the end of the finan-cial year before the financial year in which the request is made.

Under the Code, your franchisees can request, and you must provide, a copy of your disclosure document once every 12 months. This request must be made in writing. The Code spec-ifies that you must provide a franchisee with a copy of your latest disclosure document within 14 days of the franchisee’s request.

If you do not have an updated disclosure document because you were covered by the disclosure exemption, the Code allows you up to two months to update the disclosure document and provide a copy to the franchisee.

There are some important matters that may arise after you have provided a franchisee or prospective franchisee with a disclosure document. As a franchisor, you must provide your franchisees and prospective franchisees with updated disclosure of matters that are materially relevant facts.


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Franchise 2021

the Code guide and prescribe many aspects of the process of offering and selling a franchise, other than the sale of the busi-ness itself, if already operating and intended to be transferred in conjunction with entering the franchise. This aspect is regu-lated by each state’s individual laws regarding commercial or retail leasing, as well as laws relating to the sale of property.

3.2 Is there a maximum permitted term for a franchise agreement?

No, there are no restrictions as to a maximum term for a fran-chise agreement; however, in most instances, the franchisee will seek to align the franchise term with the term of the lease.

3.3 Is there a maximum permitted term for any related product supply agreement?

No, there are no restrictions as to a maximum term for any supply agreement and this will depend on the contract negoti-ated with the supplier in consideration.

3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?

Yes, the ACL and CCA have protections in place in regard to the maintenance of fair pricing, as well as anti-competition laws to protect against the creation or development of cartels, as well as collusive bargaining.

There may also be tax implications with the Australian Tax Office and the relevant state authorities if the sale is reviewed and deemed as below market value.

3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?

There are no legal obligations to be met in this regard; however, this does not prevent a franchisee from suing the franchisor on the basis of either terms under the CCA and ACL or on the basis of equity and loss due to unfavourable market conditions being imposed on a franchisee.

3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?

Restraints, etc. are legally enforceable; however, the courts are generally unwilling to enforce too many limitations on a fran-chisee, under the notion that they too must be able to maintain a living. If, however, it can be shown that the same are reason-able in the circumstances and necessary for reasons including the protection of intellectual property rights of the franchisor and the goodwill of the individual business, then the chances to enforce are improved.

4 Protecting the Brand and Other Intellectual Property

4.1 How are trade marks protected?

Trade marks, though also recognised in the common law, should be registered in relation to relevant goods and services with IP

1.11 Does membership of a national franchise association impose any additional obligations on franchisors?

No, it does not.

1.12 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?

All documents which are to be relied upon under Australian law are advised to be provided and executed in English but there is no specific requirement.

2 Business Organisations Through Which a Franchised Business Can be Carried On

2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?

Foreign citizens cannot themselves own a company within Australia and must either register an Australian company or operate as a foreign company in Australia with registration.

If buying an existing Australian business, then the purchase will have to be assessed and approved by the Foreign Investment Review Board (FIRB) beforehand.

If a business is to be operated by an Australian company but with foreign directors, then at least one director of the company must be domiciled in Australia for the purposes of ASIC compli-ance and correspondence.

Alternatively, if a business is to be controlled by a ‘foreign company’, as otherwise defined in section 9 of the Corporations Act 2001 (Cth), then it must still be registered with ASIC in order to be able to carry out business in Australia.

In either instance, a registered office, within Australia, must either be operated or selected, which is open during business hours and capable of dealing with business matters on behalf of the company. This may even be the office of your Australian accountant or lawyer.

Other laws as to approvals for the ownership of businesses by foreigners are applicable depending on the nature of the busi-ness and the scope of operation.

2.2 What forms of business entity are typically used by franchisors?

An Australian incorporated company with an office or agent based in Australia.

2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?

See question 2.1 above.

3 Competition Law

3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.

As described in section 1 of the CCA, the ACL and in turn



Franchise 2021

the franchise agreement for breach and then also commence court proceedings for recovery of damages considered to have been incurred as a result of the breach, including that the misrep-resentations provided led them to enter the franchise and incur debts which would not have otherwise been incurred.

5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for pre-contractual misrepresentation allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?

The master franchisee is liable to sub-franchisees for any non-compliance. Should, however, the cause of the non-com-pliance or misrepresentation be as a result of actions/inactions taken by the Head Franchisor, then the master franchisee may subsequently claim against it for recovery.

5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including disclaimer clauses in the franchise agreement?

Information regarding all materials or information provided to franchisees prior to the issue of franchise documentation should be recorded in the Prior Representation Deed. If this is done, then the franchisor can potentially avoid a claim that the franchisee relied on such earlier information as forming part of the final documentation.

5.4 Does the law permit class actions to be brought by a number of aggrieved franchisees and, if so, are class action waiver clauses enforceable?

Class actions are possible but are governed by the laws of each state. Waiver clauses are unlikely to be enforceable as under equity the courts are likely to give franchisees the opportunity to have their position heard, even if there is not a clear basis under legislation.

6 Governing Law

6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?

The jurisdiction of the franchise may be nominated between the parties; however, this does not prevent the courts of Australia hearing any dispute should the parties be otherwise located in Australia and it is agreed that it is more appropriate in the circumstances that the matter be determined in Australia.

Under the Code, however, all mediations which are conducted as a result of a dispute being notified from one or another party must be conducted in Australia where the franchise is located in Australia.

6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries’ courts, for interlocutory relief (injunction) against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information?

It is possible to enforce foreign judgments in Australia upon

Australia. There are a number of classes (described goods or services) to which registration can attach and any registration should reflect the goods and/or services provided to customers, rather than internal services, i.e. internal marketing or training, etc. The protection afforded by initial registration is 10 years with an ability to renew on application. Registration provides the ability to claim a broad range of protection for identical or decep-tively similar trade marks against infringing parties and facili-tates applications for registration in most overseas jurisdictions if parties to the relevant treaties. The time period for extending local registration with statutory priority to offshore jurisdictions is six months. The list of countries in which a priority registra-tion can be claimed is determined by the signatories to the Paris Convention of 1979, as amended, with Convention countries listed in the regulations to the Trade Marks Act 1995.

4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?

There is no trade secrets or know-how legislation. There are stat-utory acknowledgments such as prohibitions on the improper use by employees of this information under the Corporations Act. In any case, they can be enforced in the course of court proceedings if the same are considered to have been stolen or used for purposes outside those contemplated and licensed for use by the owner.

The phrase trade secrets or know-how means a type of confi-dential information associated with commercial purposes. It is ‘a device, or technique used in a particular trade or occupation and giving an advantage not generally known’.

The protection of trade secrets, though protected by equity, is always the subject of careful contractual drafting in franchise agreements. Remedies against breach are founded on allega-tions of breach of confidentiality (the need to establish that the information has the necessary quality of confidence, that it was conveyed in circumstances where the confidence obligation was evident and that there was unauthorised use causing detriment). There needs be a nexus to a trade or occupation.

4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?

Copyright is protected under the Copyright Act 1968 (Cth) but is generally not a registered form of intellectual property. In regard though to some literary works, a registration can be sought with the Copyright Council of Australia.

Copyright must otherwise be enforced via court proceedings and depends on the ability of the claimant to demonstrate that they are the creator or hold the rights in regard to the unique copyright work that is sought to be enforced.

5 Liability

5.1 What are the remedies that can be enforced against a franchisor for failure to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?

A franchisee may report any failure to comply with disclosure requirements to the ACCC, which may in turn review and fine or penalise the franchisor and/or its officers and directors for the same. The franchisee may also in this regard seek to terminate


16 Australia

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7.4 Give a general overview of the commercial real estate market. Specifically, can a tenant reasonably expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding “key money” (a premium for a lease in a particular location)?

Rent free periods will depend on the nature of the property to be rented, i.e. if in a shopping centre or not, as well as the existing market conditions. In times such as the COVID-19 pandemic, the ability to negotiate such rent free periods increases as other tenants suddenly leave and shops, etc. are otherwise left empty for extended periods. Previously premium locations, e.g. Sydney CBD, which in normal times would demand premium prices, may also be currently negotiable due to significant downturn in foot traffic since the COVID-19 pandemic.

In any case, commercial and/or retail leases will incur an initial amount to be paid as a guarantee or bond, which is required prior to occupation of the premises.

8 Online Trading

8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee’s exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?

In many instances nowadays franchises are offered on a non-exclusive basis but nevertheless, yes, the franchisor may direct a lead to a franchisee which otherwise originates from outside any exclusive territory or marketing territory but this is not something regulated by legislation and will depend on any clauses included in the franchise agreement on this topic.

8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?

No, the franchise agreement will generally provide for any intel-lectual property, including domains, that is licensed to be used by a franchisee to be required to be returned upon the termina-tion or expiry of the franchise. Provided it is made clear that this item forms part of the franchise network’s intellectual property, there should be no barrier to recovery.

9 Termination

9.1 Are there any mandatory local laws that might override the termination rights one might typically expect to see in a franchise agreement?

It needs to be ensured that upon the termination of a franchise the prescribed measures at items 26–29 of the Code are met. In general, such measures, for example, will require a mediation to be conducted prior to any termination except in special circumstances.

9.2 Are there local rules that impose a minimum notice period that must be given to bring a business relationship that has existed for a number of years to an end, which will apply irrespective of the length of the notice period set out in the franchise agreement?

application to the court regarding the same and the court then considering the orders made elsewhere and how or if they can be applied under Australian law. This is not, however, a clear-cut matter and the courts in Australia are entitled to review the matter prior to enforcing any such judgment.

6.3 Is arbitration recognised as a viable means of dispute resolution and is your country a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Do businesses that accept arbitration as a form of dispute resolution procedure generally favour any particular set of arbitral rules?

Though arbitration is possible in Australia and is conducted in regard to commercial supply and/or transport disputes, the Code requires that mediation be conducted between the parties as a first step.

Should the parties agree, however, yes arbitration can be conducted and can allow for an easier enforcement of foreign judgments as the rules around arbitration and the enforceability of decisions made are determined by the parties.

7 Real Estate

7.1 Generally speaking, is there a typical length of term for a commercial property lease?

At this moment, and during the COVID-19 pandemic, lease terms in particular are quite varied. Most commercial land-lords, however, seek a minimum of two years, with the preferred lease term being five years. Whether or not a renewal or second option term is offered depends on the circumstances.

7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant’s shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?

A step-in deed can be executed, though it is best entered as at the time of entering the franchise as it also requires the signature of the landlord. It is unlikely that any provisions around this may be enforceable at a later date as the landlord would be unaware and would at that stage seek to undertake a complete assignment of the lease and/or termination of the lease. A process then of vetting any incoming new lessee would also be requested and may delay any process to step in.

Many franchisees, however, commence a lease before commit-ting to the franchise and so the same can be difficult to obtain, even early on, though it should be noted it is to the landlord’s benefit to execute the same as it ensures an ongoing tenancy and income.

7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?

Yes, foreign persons must notify and obtain approval from FIRB before purchasing an interest in any developed property, residential or commercial, if this is above the relevant threshold. Since the COVID-19 pandemic, however, all foreign purchases are required to be screened by FIRB.



Franchise 2021

includes individuals, companies, trusts, partnerships and/or super funds.

Taxes will also be applied upon any transfer of such assets between entities as intellectual property is treated for tax purposes as a non-tangible asset, holding value and in turn allowing for income to be earnt as a result.

Structuring advice is recommended to be sought from a qual-ified accountant.

11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?

No, this may be decided between the parties; however, many in Australia would prefer and are more accustomed to paying in Australian Dollars. It is not common in Australia to pay in foreign currencies and many may react negatively to the same, due to the conversion rate applicable at the time.

12 Commercial Agency

12.1 Is there a risk that a franchisee might be treated as the franchisor’s commercial agent? If so, is there anything that can be done to help mitigate this risk?

No, unless the franchisor has allowed the franchisee to engage in activities that would otherwise be the role of the franchisor, i.e. seeking other franchisees in the territory without being formally engaged as a master franchisee. This may be miti-gated by ensuring franchisees conduct their businesses within the confines of the agreements in place and otherwise prop-erly documenting any additional roles which may go outside the scope of the franchise agreement, i.e. a contract for business development services.

13 Good Faith and Fair Dealings

13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?

Yes, this is required by both the Code and under the common law of the courts. This requirement, however, only goes so far as needing each party to give consideration to the other and their interests in the course of the dealing, as opposed to trying to provide everything that is desired of the other party.

14 Ongoing Relationship Issues

14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?

Yes, in addition to the Code of Conduct and laws as provided under the CCA/ACL, including in regard to unfair contracting, all of which regulate the ongoing franchise relationship, there are other applicable industry-based laws which will outline additional requirements. Further, there will be laws relating to product safety, etc. which the franchisor will need to ensure compliance with as they are asking franchisees to obtain and sell such products to consumers.

Generally, an accepted minimum notice period is 30 days and this is what is also prescribed in the Code. The same time frame is to be applied where the franchise agreement may have other-wise not been renewed and proceeds to a month-to-month agreement. If mutually agreed in writing, the notice period can be reduced. Only if and where conditions are met for immediate termination, i.e. bankruptcy or criminal charges being laid, can this time period be waived.

10 Joint Employer Risk and Vicarious Liability

10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee’s employees? If so, can anything be done to mitigate this risk?

Franchisors have in recent times been found to be ultimately liable for statutory obligations of franchisees in relation to their employees, for example where a franchisee underpays staff. The determining factor is whether the franchisor was aware of this activity and whether any mitigating measures were taken to prevent breaches to legislation, in particular the Fair Work Act 2009.

A franchisor may otherwise be a joint employer if the fran-chise business is operated with shared shareholdings between franchisee and franchisor and both take an active role in the day-to-day operation of the business.

10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee’s employees in the performance of the franchisee’s franchised business? If so, can anything be done to mitigate this risk?

A franchisor may be found to be liable in the instance that particular actions or inactions of employees are or can be deter-mined to be a result of the franchisor providing insufficient training and guidance to franchisees in regard to their obliga-tions to employees. As such, a dedicated and planned training regime, including regular ongoing learning, should be estab-lished to mitigate such risks.

11 Currency Controls and Taxation

11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?

No, there are no restrictions in this regard; however, there are possible tax implications to consider and advice on the transfer of monies out of Australia should be obtained.

11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?

Yes, if amounts are paid to a ‘foreign resident’ then withholding tax is likely to be applied. A ‘foreign resident’ for tax purposes


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A step-in deed is possible in regard to the premises within which the franchise is operated but the same must be executed, with the landlord of the premises in question (if leased), as at or prior to the entering of the franchise agreement. It can otherwise be quite difficult to obtain such consent from a landlord after the fact and once the lease has already been signed. Ultimately, in regard to franchises with physical premises, the landlord or property owner has the final say as to whether or not such a right can be enforced at the appropriate time.

Where the franchise is a mobile site, terms within the fran-chise agreement around reoccupation upon default and following appropriate dispute resolution processes, etc. may be simply inserted and relied upon at the appropriate time.

16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or “step-in” rights, will such a power of attorney be recognised by the courts in the country and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?

Such a clause, even if included in the franchise agreement, will only likely be enforceable if a power of attorney document is separately executed and signed by the franchisee at the time of execution. If this does not occur, though the same could be argued within the courts as being contemplated by the parties, it is likely that the courts would find this to be inequitable and give ability to the franchisee anyway to protect his/her own interests.

17 Electronic Signatures and Document Retention

17.1 Are there any specific requirements for applying an electronic signature to a franchise agreement (rather than physically signing a “wet ink” version of the agreement), and are electronic signatures recognised as a valid way of creating a binding and enforceable agreement?

Yes – every state since the commencement of the COVID-19 pandemic has implemented since April 2020 varied legisla-tion regarding the manner by which electronic signing and witnessing is to be conducted.

Otherwise and more broadly, electronic signatures may be used if it is mutually agreed between the parties to do so and, further, that there is written evidence that the person who is attaching the electronic signature has in fact agreed and given authority for the use of the same.

17.2 If a signed/executed franchise agreement is stored electronically (either having been signed using e-signatures or a “wet ink” version having been scanned and saved as an electronic file), can the paper version of the agreement be destroyed?

All original documents are expected to be retained for seven years; however, if an electronic version is saved securely, then the original could be destroyed but it is advised that it be never-theless retained in case there is a need to verify execution at a later date.

15 Franchise Renewal

15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?

The Code requires you to notify a franchisee, in writing, as to whether you intend to either extend the franchise agreement or enter into a new agreement when the term of the agreement ends.■ Iftheterm of the franchise agreement is six months or

longer, you must notify the franchisee of your decision at least six months before the end of the term of the franchise agreement.

■ Iftheterm of the franchise agreement is less than six months, you must notify the franchisee of your decision at least one month before the end of the term of the franchise agreement.

If you intend to extend the franchise agreement, you must include a statement in the notice to the effect that the franchisee may request a copy of the disclosure document.

15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?

No – the franchisor has the final decision on whether or not to grant a renewal; however, this is also dependent on the agree-ment and how it has been drafted.

15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?

There is no automatic right to compensation; however, it should be noted that if the refusal cannot be justified, then there is a high chance of the franchisee suing about the same in court and seeking damages to compensate.

16 Franchise Migration

16.1 Is a franchisor entitled to impose restrictions on a franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business?

Yes, under the Code, the franchisor is entitled to be involved and able to review the sale, assignment or transfer process, including having the final say on who is considered appropriate and/or who is approved to take over and continue the franchise. This must, however, be done in a reasonable manner and should be clearly advised both at the time of entering the franchise and at the time of sale or assignment, etc. as to what is the franchisor’s considerations and the reasons for any decision made.

16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a “step-in” right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?



Franchise 2021

18 Current Developments

18.1 What is the greatest threat to franchising from the Coronavirus pandemic? Will the response to the pandemic bring any significant new opportunities to the franchise industry?

The COVID-19 pandemic has certainly brought doubt and some hesitation into the market in terms of possible revenue to be made due to the overall slowdown of the economy. At the same time though, for those who are keeping their eyes open, there is probably now greater opportunities than before in regard to suburban areas, due to slowdowns in central CBD districts. For those priced correctly, there are also more people in the market looking for their next opportunity and so fran-chises that are actively marketing and engaging with the market may have opportunity for growth.


20

Nina Rossi, with years of experience in business/commercial law, litigation, franchise law, and intellectual property, as well as a positive history of managing clients’ legal challenges, has a track record of dealing with legal issues on a pragmatic and commercial basis, always with the aim of avoiding unnecessary and costly mistakes that could bring about litigation. With hands-on experience across many franchise networks and brands, Nina gives her unique perspective in the day-to-day operational and commercial concerns of franchisors and franchisees operating in business today. She writes regularly for a range of franchise business publications on the issues associated with franchise law and practice. Nina has an incisive mind and broad skill set coupled with many years specialising in IP and business law which makes her a highly valued advisor to DC Strategy’s domestic and international clients.

DC Strategy LawyersLevel 1, 165-67 Phillip StSydney NSW 2000Australia

Tel: +61 2 8220 8700Email: [email protected]: www.dcstrategylawyers.com

Franchise 2021

Australia

DC Strategy Lawyers, along with being a law firm, works closely with DC Strategy, who for 30 years have assisted many of Australia’s well-known brands to develop from humble beginnings to the large franchise networks they are today. DC Strategy Lawyers works as part of the DC Strategy’s end-to-end commercial, legal, recruitment, brand, marketing and consultancy business, working to assist entrepreneurs from start-ups and SMEs to NGOs, government bodies and large corporates. Our team of experienced commercial, intellectual property and franchise lawyers provide you with practical, cost-effective legal advice and assistance. We are dedicated to protecting and growing substantial enterprise value by ensuring the legal frameworks we develop or review are driven by the commercial needs of your specific business.

www.dcstrategylawyers.com


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Chapter 5 21

Austria

THUM Rechtsanwaltskanzlei ǀ Law Firm Dr. Hubertus Thum, LL.M.

Austria

In addition, in most cases the provision of the Austrian Civil Code concerning general business terms may apply. All stand-ard-form contracts are subject to a “fair and reasonable” test. In particular, section 864a and section 879 paragraph 3 of the Austrian Civil Code may be applicable. Section 864a applies to clauses which carry abnormally unusual content or matters which shock the party made subject to the terms. Section 879 paragraph 3 addresses situations where one of the parties has received a “raw deal”, was discriminated against or was other-wise made subject to a bad deal. In these situations, regarding section 864a violations, the offending clause(s) lack(s) validity provided the affected party was not made aware of the content before becoming a signatory thereto. Regarding the violation of section 879 paragraph 3, such clauses are always invalid.

The franchise agreement also may not be contra bonos mores (against generally accepted standards of moral behaviour and public decency).

Besides, the (non-binding) Code of Ethics of the Austrian Franchise Association may give directions and recommenda-tions in some legal regards.


In principle, the same legal regulations apply, regardless of whether a sole (or the first) franchisee begins or several fran-chisees start their business.

However, due to the lower experience rates, there may be differences in the pre-contractual clarification. For example, the franchisor must inform the franchisee in advance that the franchisee is the sole or first franchisee and that there is no or only limited experience.


There are no legal or other obligations to register or otherwise make known a franchise system.


There are no legal provisions or regulations stating exact pre-sale disclosure obligations. Neither is there comprehensive jurisdic-tion stating clear rules or guidelines in this regard.



There is no legal or generally applicable definition of franchising in Austria.

The Austrian Franchise Association defines franchising as follows:

Franchising is a vertically co-operatively organized sales system of legally independent companies on the basis of a contractually regulated continuous obligation. This system has a uniform appearance on the market and is characterised by the division of labour between the system partners and by a system of instructions and controls to ensure conduct in conformity with the system.

The franchisor’s service program is the franchise package. It consists of:■ A procurement, sales and organizational concept, ■ the right of use of intellectual property rights, ■ the training of the franchisee, ■ the obligation of the franchisor to actively support the franchisee and

constantly develop the concept further. The franchisee operates in his own name and for his own account; he has

the right and the obligation to use the franchise package for a fee. As a service contribution he provides work, capital and information.

The Austrian civil supreme court defines the franchise agree-ment generally as follows:

The franchise agreement establishes a continuing obligation relationship whereby the franchisor grants the franchisee the right, against payment, to distribute certain goods and/or services using the franchisee’s name, trade-mark, equipment, etc., as well as the franchisor’s commercial and technical experience and in compliance with the franchisee’s organizational and adver-tising system developed by the franchisor, whereby the franchisor provides the franchisee with technical and sales assistance, advice and training and exer-cises control over the franchisee’s business activities.


There are no specific laws, regulations or government authori-ties that regulate the offer and sale of a franchise in Austria. The principle of freedom of contract applies.

For offers and sales of franchises, besides European legisla-tion (e.g. GDPR) and the general provision of contract law of the Civil Code, the following Austrian laws in particular must be taken into consideration: the Consumer Protection Act; the Act Against Unfair Competition; the Antitrust Law; the Corporate Code; the Trademark Protection Act; and the Copyright Law.


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informed about this right of withdrawal, he can revoke the contract within one year and 14 days.


In case of sub-franchising, it is the sub-franchisor’s obligation to fulfil pre-sale disclosure obligations. The general aspects and rules of pre-sale disclosure apply (see question 1.5). In addition, the sub-franchisor has to provide proper information about specialties related to the sub-franchising structure.


There is no specific format of disclosure prescribed by Austrian law or other regulation. As a guideline, franchisors are well advised to follow the recommendations of the (non-binding) Code of Ethics of the Austrian Franchise Association (see ques-tion 1.5), which ask for all relevant information to be provided in writing. Besides the latter, it is also highly advisable to have written proof of disclosures provided in case of court proceedings.

There is no general obligation for continuing disclosure to existing franchisees. Nevertheless, an obligation to provide the franchisee with updates relevant to his business can follow from the general principle of good faith and the mutual duty of loyalty under the franchise agreement. The obligation for disclosure to existing franchisees may also be relevant in case of relevant adaptations of the franchise structure in general or the fran-chisee’s business specifically.


In principle, the general provisions of contract law of the Austrian Civil Code apply. In the case of a violation of the fran-chisor’s duty to present the relevant facts up-front, the fran-chisee has the right to claim damages (culpa in contrahendo). The franchisor has to put the franchisee in the position it would have been in if the franchisor had fulfilled its disclosure obligation. If the franchisee agreed to the franchise agreement without full disclosure, it may rescind the franchise agreement. The fran-chisor, therefore, can be ordered to consent to the cancella-tion of the franchise contract, to pay all franchise fees obtained back to the franchisee and to reimburse the franchisee for all expenses incurred in connection with the franchise business. At the same time, income already earned from the franchise has to be deducted.

In very severe and exceptional cases, the franchisor could commit the criminal offence of fraud if he (intentionally) misleads the franchisee by deceiving him about relevant facts into signing the franchise agreement and causing the franchisee damages.


Under Austrian statutory law, there are no franchise-specific obligations that have to be met before a franchise may be offered

Generally, according to the Austrian Civil Code, prior to the conclusion of a contract (pre-contractual negotiations) all potential contractual parties are obliged to ensure that the rele-vant facts have been clearly presented and all necessary and rele-vant information regarding the envisaged contract is disclosed. The content and scope of this duty depends on the individual case, taking into account the experience and the knowledge of the franchisee. The franchisor shall provide all relevant infor-mation about how the franchise system works and its sales fore-cast. Any lack of information or misleading information that is relevant for the potential franchisee’s business may lead to liability on the basis of a breach of pre-contractual disclosure obligations (culpa in contrahendo). In some cases, it may also lead to the franchisee’s right to challenge the whole contract due to error.

Generally, the (non-binding) Code of Ethics of the Austrian Franchise Association recommends information on the following topics:■ Legalname,legalformandlegaladdressofthefranchisor.■ Trade mark, trade name and business name of the

franchisor.■ Descriptionofthefranchiseconcept.■ Information regarding the franchisor’s intellectualprop-

erty to be licensed to the franchisee.■ Existenceofapilotbusiness.■ Initialandongoingsupportbythefranchisor.■ Required capital and manpower for the franchisee’s

business.■ Rightsandobligationsofthefranchisee.■ Any criminal convictionsor any findingof liability in a

civil action or arbitration involving the franchise.■ Any bankruptcy, insolvency or comparable proceeding

involving the franchisor.■ Informationonthecategoriesofgoodsandservicesthat

the franchisee is required to purchase or lease.■ Adescriptionofthegeneralandlocalmarketoftheprod-

ucts or services and the prospects for development of the market.

■ Accurate information on the profitability of the fran-chisee’s business.

■ Actualnumberoffranchisees.■ Pending lawsuits with an impact on the potential fran-

chisee’s business.As a guideline, franchisors are well advised to follow the addi-

tional recommendations of the (non-binding) Code of Ethics of the Austrian Franchise Association:■ Advertising for the acquisition of franchisees should be

without ambiguity and without misleading information.■ All advertisements and promotional material for the

purpose of franchisee acquisition that directly or indirectly address any future results, numbers or merits that may be expected from individual franchisees shall be factually accurate and unambiguous.

■ Inordertoenableprospectivefranchiseestoenterintoanybinding agreement in full knowledge of the facts, a copy of the current Code of Ethics or public access thereto will be provided to them within a reasonable time prior to the signing of that binding agreement and full and accurate written disclosure of all information and documents rele-vant to the franchise will be provided.

If the franchisee does not conclude the franchise agreement on behalf of a corporation, he may be classified as a consumer within the meaning of the Consumer Protection Act. In such a case, the franchisee may, under certain circumstances, have a right of withdrawal for at least 14 days in respect of the franchise agreement concluded by him. If the franchisee is not properly


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Franchisors may continue using their initial legal entity in their home country. If they want to set up a business in Austria, they may do so under a variety of legal forms, e.g.:■ Sole trader (Einzelunternehmer; suitable only for single

entrepreneurs).■ Partnerships(Offene Gesellschaft, Kommanditgesellschaft; gener-

ally no limitation in liability).■ PublicLimitedLiabilityCompany(Aktiengesellschaft).■ Limited Liability Company (Gesellschaft mit beschränkter

Haftung – GmbH).The most common legal form is the GmbH due to its limita-

tion of personal liability for the shareholders and a noteworthy freedom regarding internal agreements. An Austrian GmbH requires a minimum amount of capital investment (generally at least €35,000; under certain circumstances at least €10,000 in case of a “foundation privilege”). A GmbH must publish its annual accounts in the commercial register.

Franchise joint ventures as a vehicle for establishing a network in Austria are possible but are not a common vehicle.

There is no reasonable data on whether master franchising or area development is more common in Austria. Nevertheless, both options are a reasonable and possible way of getting into the Austrian market. In case of an area development agreement, less comprehensive pre-sale disclosure obligations may apply.


Anyone wishing to conduct business in Austria within an Austrian business entity, whether a sole trader or large company, needs a business licence that governs the activities in which it will be engaged. According to the Austrian Trade Regulation Act, restrictions exist, depending on the type of activity sought to be performed and the location of that specific business.

There are some (few) exclusions from this obligation. Notifiable trades constitute the vast majority of businesses and may be carried out subject to prior notification to the trade authority. They are subdivided into free trades and regulated trades. The latter require compliance with specific criteria (namely age, qualification and experience). All trades are regis-tered in the trade register.

Besides natural persons, legal entities such as corporations, partnerships and branches of foreign companies may carry out a trade, provided that they have appointed a business representa-tive. This representative, who can be a different person from the managing director but needs to be an employee of the company (with at least 20 hours per week of working time), is responsible for compliance with industrial trade law provisions. Generally, the business representative may not carry out his activity for more than two companies at the same time.

If a business activity is carried out via a foreign company, this may lead to the assumption of a place of business (“Betriebsstätte”) and therefore might also have tax consequences.

3 Competition Law


Austrian competition law is generally in line with European

or sold. The franchisor must comply with the general principles as described above. In addition, all marketing and advertising material shall comply with local advertising laws and standards and should not be misleading.

The (non-binding) Code of Ethics of the Austrian Franchise Association states the following obligations:■ Thefranchisormusthavesuccessfullyoperatedabusiness

concept in the relevant market for at least one year and with at least one pilot project.

■ Thefranchisormustbetheownerorrightfuluserofthecompany name, trade mark or other special identification of its franchise system.

■ The franchisormust provide initial training to the indi-vidual franchisee and provide ongoing commercial and/or technical assistance throughout the term of the contract.

Observance of the stated principles of the Code of Ethics is obligatory in order to become and remain a member of the Austrian Franchise Association.


No, membership of the Austrian Franchise Association is not mandatory. The Austrian Franchise Association offers different membership models, depending especially on seniority. Generally, membership of the Austrian Franchise Association is seen as a quality feature for recognised franchise systems within Austria. Thus it is commercially recommendable to become a member at some point.


Members of the Austrian Franchise Association must comply with the standards set in the Code of Ethics (see https://www.fran-chise.at/wp-content/uploads/2019/07/ETHIKKODEX-2018.pdf). The Code of Ethics of the Austrian Franchise Association is in compliance with the European Code of Ethics for Franchising of the European Franchise Federation (EFF).

Additionally, to become a full member, franchisors must conduct a comprehensive quality review, including the checking over of the franchise agreement by an attorney.


No, there is no such requirement. Nevertheless, in case of court proceedings in Austria, a (certified) translation of the agreement and all other relevant documents will become necessary, given that the language in court needs to be German.



No, generally there are no Austrian investment laws or other national laws that impose restrictions on non-nationals in respect of the ownership or control of a business.


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certainrequirements(seeEuropeanCourtofJustice,judgmentof28January1986,caseNo.161/84,ECR1986,353,Pronuptia). In practice, the benchmark for proving that a restriction on competition (e.g. purchase obligation) is essential for the fran-chise system can be quite high.

If a purchase obligation is not essential for the identity and reputation of the franchise system (or this circumstance cannot be proven), the BER can still apply: according to article 5 BER, purchase obligations are exempted by the BER where the dura-tion is neither indefinite nor exceeds five years. Contracts that are tacitly renewable beyond a period of five years are therefore not exempted by the BER. In the case that goods are sold or services are provided by the franchisee from the premises and land owned by the franchisor or leased by the franchisor from a third party not connected to the franchisee, the non-compete obligation may be of the same duration as the period of occu-pancy of the premises and land.

The BER only applies to franchise systems with a market share of less than 30 per cent. In case of higher market shares, an individual exemption under article 101(3) TFEU might still be possible.


Generally, every form of direct or indirect price-fixing is strictly prohibited by Austrian and European antitrust law. The fran-chisee must be free to determine the price of its products or services. This includes the franchisee’s actual and technical possibility to set his own price (e.g. in his IT software, etc.). Price-fixing clauses cannot be exempted by the BER. Nevertheless, the franchisor is allowed to set maximum retail prices and to issue non-binding price recommendations. Regarding the guidelines on vertical restraints of the European Commission, fixed resale prices may be permissible to organise a coordi-nated short-term low price campaign in a franchise system (two to six weeks in most cases). In contrast to European competi-tion law, the Austrian Cartel Act requires explicit mention of the non-binding nature of recommended prices (e.g. on price lists for franchisees).

It is highly recommendable to consult a specialised lawyer before imposing any kind of pricing guidelines on the franchisee.


In general, a franchisee cannot be provided with an abso-lutely exclusive area. Nevertheless, franchisees may be prohib-ited from distributing actively outside of their exclusive areas. Active distribution consists of all forms of marketing where the franchisee is actively approaching potential customers. Passive distribution is all forms of marketing where the franchisee is not actively approaching potential customers, but just responding to their requests. Passive distribution cannot be prohibited. Thus the franchisee cannot be restricted in delivering goods or providing services to customers outside of his exclusive area, if such customers were not approached actively by the fran-chisee. In general, the European Commission considers having a website as a form of passive selling that cannot be prohibited either.

Even when not having agreed on an exclusive area, there might be restrictions on the franchisor granting a second fran-chisee rights to operate a franchise in the initial franchisee’s area.

competition law. The latter is applicable as soon as trade between EU Member States is affected, which is usually the case.

All forms of competition restraints in distribution agree-ments, such as non-compete clauses, price-fixing and guaran-teed exclusive areas, are in line with European antitrust law. It prohibits agreements between undertakings that may affect trade between Member States and that have as their object or effect the prevention, restriction or distortion of competi-tion within the common market. Except for hardcore restric-tions such as price-fixing, under certain circumstances exemp-tions can be made on an individual basis or, if applicable, under a block exemption (e.g. EU Block Exemption Regulation No. 330/2010 – BER). Austrian law is in line with European anti-trust law, but Austrian antitrust law regarding misuse of domi-nant position is wider in scope because it permits the existence of a dominant position when one party has a severe business disadvantage coupled with a reliance on the imposing (and therefore “dominant”) party.

In contrast to European competition law, the Austrian Cartel Act requires explicit mention of the non-binding nature of recommended prices (e.g. on price lists for franchisees).

In addition to antitrust regulations, the competitive rela-tionship with competitors is regulated in particular by the Act against Unfair Competition (UWG).

Depending on the area of business, the Local Supply Act (“Nahversorgungsgesetz”) may be relevant. The Local Supply Act regulates the behaviour of companies in their commercial deal-ings with each other if this could impair effective competition. Special consideration is given to local supply and the obligation to supply.


In principle, Austrian law allows freedom of contract; the parties can make an individual agreement. Exceptions to this rule usually follow – in connection with franchising – antitrust law, the rules on contract forms or general terms and conditions and consumer protection law. Under certain conditions, some provisions of the Commercial Agents Act can also be applied analogously to franchisees.

As a general rule, particularly long contractual relationships of the franchisee (10 years or more) require special justification. One argument can be particularly large investments on the part of the franchisor.

Conversely, particularly short contract periods or particu-larly short termination options in favour of the franchisor can often trigger claims for damages by the franchisee or are even considered invalid if a large part of the investments agreed with the franchisor are lost to the disadvantage of the franchisee as a result.


Generally, the franchisor must be able to take the measures necessary for maintaining the identity and reputation of the network bearing his business name or symbol. It follows that provisions which establish the means of control necessary for that purpose do not constitute restrictions on competition. That is also the case with regard to the franchisee’s obligation to sell the goods covered by the contract only in premises laid out and decorated according to the franchisor’s instructions, which is intended to ensure uniform presentation in conformity with



Franchise 2021

trade mark is less and its enforcement is much more difficult than in comparison to a properly registered trade mark. Besides, the catalogue of possible claims is shorter.

There are different types of trade marks:1. Word mark for pure names, regardless of the representation.2. Word and figurative mark for the combination of lettering

with graphic elements.3. Figurative mark for logos without lettering.4. Other types of trade mark such as 3D trade mark, position

trade mark, multimedia trade mark, colour trade mark, etc.Often a broader protection is offered by the word mark

compared to the word and figurative mark. However, this broader protection also increases the risk of conflict. If a sign consists of a word and a picture, the dominant part is decisive for the overall impression.

Normally, trade mark protection is necessary and sensible where the franchisor’s own market interest or the market interest of the franchisee lies.

The following possibilities are available:1. National application directly in Austria at the Austrian

Patent Office (www.patentamt.at).2. International application: Direct national application in

Austria at the Austrian Patent Office and extension of this basic trade mark to other countries within six months at an international level.

3. EU trade mark with an application at the European Union Intellectual Property Office (EUIPO; www.euipo.europa.eu).

The EU trade mark offers the advantage of covering the entire EU internal market (caution: without Switzerland, Liechtenstein, Norway, Iceland!). Registration is possible with or without prior Austrian trade mark registration.

With the registration of a trade mark, it is protected for 10 years from the date of registration in the trade mark register. The protection can then be extended indefinitely for a further 10 years at a time.


Austria has implemented the provisions of the EU Trade Secrets Directive (2016/943) in sections 26a–26j of the UWG. The provi-sions are intended to provide stronger protection for trade secrets and counteract the danger of industrial espionage and betrayal of secrets. Previously, the protection of trade and business secrets was mainly characterised by case law. Nevertheless, compared to other European countries, the protection level was at a decent level before the implementation of the Trade Secrets Directive.

As legal remedies, the law provides for provisional and precautionary measures by way of interim injunctions; further-more, the seizure or delivery of suspected infringing goods shall be possible. In cases of intentional behaviour, the infringer shall pay damages to the trade secret holder.

Claims arising from the infringement of trade secrets are subject to a limitation period of three years from the date of knowledge of the infringement and the alleged infringer. In any case, such claims shall become time-barred six years after the act of infringement occurred.

Negligence in the protection of one’s own know-how can lead to the loss of legal protection. In addition to appropriate tech-nical precautions, the necessary protective measures also include confidentiality agreements.

The new sections in the Act against Unfair Competition are also intended to provide for new procedures to protect the confi-dentiality of trade secrets in the course of legal proceedings.

This restriction is based on the mutual duty of loyalty under the franchise agreement, under which both parties are obliged to support each other’s businesses and to avoid harming it.


Non-compete obligations often prohibit the franchisee, for the duration of the agreement, from running a competing business in the same market as the franchise. Such non-compete obliga-tions are subject to competition law, as their effect is the restric-tion of the franchisee’s freedom of business activities and the prevention of other franchisors from distributing their products or services through the franchisee involved. Provisions in fran-chise agreements that are essential to protecting the franchisor do not constitute restrictions of competition for the purpose of article 101 of the Treaty on the Functioning of the European Union. If a non-compete clause is not essential for the protec-tion of the franchisor, the BER can still apply. In such case, non-compete clauses for the duration of the agreement must not exceed a period of five years or longer if the franchisor is the owner or lessor of the business premises. In contrast, non-compete clauses after the termination of an agreement may not exceed one year. These exemptions apply where the franchisor and the franchisee each have less than a 30 per cent market share. If a franchise partner has a market share above 30 per cent, an individual self-assessment regarding whether such provision of the franchise agreement restricts competi-tion on the respective market must be conducted. According to the BER, post-term non-compete clauses are generally invalid. Non-compete clauses for one year are exempted if they apply to competing products or services only, are essential for the protection of know-how and are restricted to the franchisee’s sites. Generally, the franchisee cannot claim compensation for a (valid) post-term non-compete obligation.

It can always be agreed that the franchisee is not allowed to use the know-how provided by the franchisor after the term of the agreement, as long as the know-how is not publicly known. There are no time restrictions for such clauses.

Under Austrian procedural law, in-term and post-term non-compete clauses can be enforced by way of an action for injunction and by way of a court-ordered interim injunction.

A claim for injunction exists if two elements are given: (i) duty to cease and desist; and (ii) risk of infringement of this obliga-tion to refrain. Therefore, it is not necessary to prove fault.

In addition, injunctive relief claims presuppose that a breach of fair trading law has taken place (so-called genuine injunction claims) or is imminent (so-called preventive injunction claims). If the infringer has already acted against it once, it is assumed that he will act against it again in the future (risk of recurrence); if he has acted lawfully so far, it must be proven that the infringe-ment is imminent (risk of first infringement).



The protection of a trade mark can arise almost by itself through use, popularity and fame or can also be applied for and regis-tered. Even without application/registration, certain protection already exists by law, in particular under section 9 of the Federal Act Against Unfair Competition. Logos may also be protected by copyright. Please note that the protection of a non-registered


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General disclaimers in the franchise agreement (or in other documents) do not automatically lead to the loss of any possible liability. Nevertheless, certain disclaimers or explanations might be recommendable to avoid accusations of providing misleading information.


There is a “class action of Austrian coinage”, also called a “test process” or “association sample action”. It is known as an “Austrian-style” class action lawsuit because, for example, a class action in the USA – contrarily to Austria – does not require an individual assignment of each claim, but rather the “opting out” of those affected who do not wish to be affected by the effects of the class action.

In regard to franchise agreements, this kind of “Austrian class action” seems rather unlikely and not very practical. In practice, class actions in regard to franchise agreements are not common. Nevertheless, action waiver clauses will, in most cases, not be valid due to the Austrian law on standard terms.

6 Governing Law


Generally, the principle of contractual freedom also allows the choice of the place of jurisdiction and the applicable law to be made by mutual agreement (see also article 3 of Regulation (EC) No. 593/2008, ‘Rome I’). Nevertheless, according to the European provisions on conflict of laws, there are certain provi-sions that cannot be excluded even by a valid choice of law, for instance consumer protection law (see article 6 Rome I), compe-tition law (see article 9 Rome I) and employment law (see article 8 Rome I).

Furthermore, Austrian law can apply where provisions of a foreign law interfere with fundamental principles of the Austrian jurisdiction (so-called ‘ordre public’, article 21 Rome I).

In the event that its application is not explicitly excluded, the provisions of the UN Convention on Contracts for the International Sale of Goods (CISG) may apply.

The mutually agreed applicable law must have some connec-tion to the parties or the actual place of business involved. Agreements on the application of a law where none of the contracting parties has its business nor the franchise agreement itself is fulfilled might be invalid.

If the franchisee is signing the contract as a sole trader and has not been working in this field of industry before, he might be considered an initial founder (Existenz gründer) within the meaning of section 1 of the Consumer Protection Act (KSchG). Thus, any choice of law or agreement on the place of jurisdic-tion including an arbitration clause may be invalid. In this case, the franchisee might start a lawsuit and might only be sued at the court of his domicile or business and Austrian law would be applicable in cases where foreign law does not provide the same amount of protection for the franchisee.


Copyrights are protected under the Austrian Copyright Act. In case of a copyright infringement, Austrian law offers different instruments, such as civil, criminal and competition law. The copyright holder may, amongst other authorised users, claim removal, omission and damages. Under certain circumstances, copyright infringement may also be considered an unfair busi-ness practice under the UWG.

There is no database or register of works subject to copyright protection. In many cases, the franchise operations manual as a whole is subject to copyright protection. Whether individual parts of it also enjoy copyright protection can only be assessed on a case-by-case basis.

5 Liability


Any lack of information or misleading information in regard to disclosure that is relevant for the potential franchisee’s business may lead to liability on the basis of a breach of pre-contractual disclosure obligations (culpa in contrahendo). The franchisee might be entitled to claim damages. In some cases, it may also lead to the franchisee’s right to challenge the whole contract due to error.

In very severe and exceptional cases, the franchisor may realise the criminal offence of fraud if he (intentionally) misleads the franchisee by deceiving him about relevant facts into signing the franchise agreement and causing the franchisee damages. See also question 1.8.


Both sub-franchisors and franchisees are generally self-employed, independent entrepreneurs who are (also usually by contract) not allowed to act on behalf and for the account of their (sub-)fran-chisor. There is no direct contractual relationship between the franchisor and the sub-franchisees.

Therefore, sub-franchisees can only claim damages against the franchisor by tort law or product liability. Thus, a sub-franchisor is solely responsible for fulfilling the disclosure obligations with regard to his sub-franchisees (see question 1.6).

Nevertheless, under certain circumstances, the sub-franchisor has the opportunity to regress to the franchisor, in cases where the sub-franchisor has used and legitimately relied on the fran-chisor’s disclosure material containing misleading information regarding the sub-franchisees.

In this regard, Austrian law does not provide a possibility to exclude liability for injury to life, body or health and in case of gross fault in the franchise agreement.



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Tenancy Act or not, different regulations regarding minimum termination periods may apply.

Temporary lease and rental contracts can only be terminated if this is agreed in the contract. If this is not the case, a time limit shall cause the contract to be mutually non-cancellable for the entire duration of the time limit.


For the franchisor, it is possible to ensure that he can adopt the lease agreement related to the franchisee’s business prem-ises should the franchise agreement be terminated by stating such provision in the franchise agreement and by the landlord’s acceptance being stated in the lease agreement. In order to successfully enforce such an agreement between the franchisor and franchisee and not only claim damages, the landlord must have agreed to this provision in the lease agreement.


Generally, there are no restrictions on non-national entities being able to (sub-)lease.

The assignment of ownership must be notarised and regis-tered in the Austrian land register. Pursuant to legislation by the nine Austrian federal states concerning the acquisition of real estate by foreigners, EU or EEA citizens usually need “nega-tive confirmation”; otherwise acquisition proceedings must be notified or are subject to approval. The competent authorities in each federal state shall give their consent to the acquisition of a property by non-EU residents. In general, such approval is granted if the real estate acquirer is resident in Austria or has a residence permit. The exact regulations on the acquisition of land by foreigners are provided in the Foreigners’ Acquisition Act of the individual federal states. Some bilateral agreements provide nationals of some third countries to purchase land without an authorisation procedure.

Commercial leases are often subject to the Austrian Civil Code and the Tenancy Act. Under Austrian law, it is essential to determine under which regulatory tenancy scheme or regime a certain property falls: under the liberal regime of the Austrian Civil Code or – partly or fully – under the restrictive regimes of the Tenancy Act. As regards properties that are fully governed by the Tenancy Act, the tenant enjoys a high standard or protec-tion, including protection against rent increases beyond a regu-lated level. The conclusion of a written lease agreement trig-gers stamp duty.

According to the Austrian Civil Code, subletting is in prin-ciple permitted, but it can be contractually prohibited – whereas, in the full scope of application of the Tenancy Act, a subletting prohibition can only be enforced if there are important reasons (see below).

If subletting has not been contractually prohibited, it is never-theless not permitted if it is to the detriment of the landlord (the existing tenant).

If the lease agreement is fully covered by the Tenancy Act, the landlord may only prohibit the main tenant from subletting to a very limited extent. First of all, there must be a contractual ban


A judgment of a third state (outside the EEA) generally does not have any domestic enforcement effect in Austria unless there are international agreements or a declaration of enforceability by the European Union.

If the judgment is declared enforceable in Austria, it is subse-quently treated like a domestic judgment.Judgments issued by courts of European Union Member

States, which are enforceable in the Member State in which they were issued, are enforceable in all other Member States including Austria without the need for a declaration of enforceability (see article 39 Regulation (EU) No. 1215/2012).

Under certain circumstances, especially when the place of jurisdiction shall be outside of the franchisee’s territory, an arbi-tration clause might be recommendable.


Especially in an international context and in the context of a foreign franchisor or sub-franchisor, arbitration clauses are not exceptional and can be recommended in most cases.

Between Austrian contract parties, the Vienna Rules of the Vienna International Arbitral Centre (VIAC) are the most common ones. Among other rules, those of the International Chamber of Commerce (ICC) are very common.

Austria is a member of the New York Arbitration Convention. There is no mandatory obligation to engage in mediation before commencing formal arbitration or court proceedings unless mutually agreed otherwise.

Please be aware that if the franchisee is signing the contract as a sole trader and has not been working in this field of industry before, he might be considered an initial founder (Existenz gründer) within the meaning of section 1 KSchG (Consumer Protection Act). Thus, any choice of law or agreement on the place of juris-diction including an arbitration clause may be invalid. In this case, the franchisee may start a lawsuit and may only be sued at the court of his domicile or business. Additionally, Austrian law would be applicable in cases where foreign law does not provide the same amount of protection for the franchisee.

7 Real Estate


Under Austrian legislation, there are no special franchise-re-lated regulations concerning lease agreements or the real estate market in general. The general rules of the Civil Code and other real estate related regulations and acts apply.

Generally, the parties are free to agree on the length of term for a commercial property lease. The periods and dates of notice to be observed shall, in principle, be governed by the contrac-tual agreement. Nevertheless, especially depending on the ques-tion of whether the lease agreement is (partially) subject to the


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override the termination rights that are typical in franchise agreements. Generally, the principle of contractual freedom applies. Nevertheless, in case of unusual, surprising and disad-vantageous termination rights, the franchisee might claim the invalidity of this clause. See also question 1.2.

In the case that the franchisee is obliged by the franchisor to make big investments (e.g. infrastructure), the franchisee might also claim damages if the termination period is too tight.


All continuing obligations, including franchise agreements, can be terminated for good cause, irrespective of time limits, notice periods or termination dates. The right to terminate for good cause cannot be waived in the contract. In principle, the contractual relationship will be terminated immediately in the event of (justified) extraordinary termination.

Prerequisites for extraordinary termination are the existence of an important reason and the unreasonableness of maintaining the contract for the terminating party.

When assessing whether a sufficiently important reason exists, Austrian case law applies a strict standard; the extraor-dinary termination is therefore only the “outermost emergency valve” to terminate a contract. Important reasons include a breach of major obligations regarding the contract, considerable loss of confidence in the person of the contractual partner, or a serious change of circumstances. To assess whether, e.g., a breach of obligations regarding the contract justifies the termi-nation of the contract for good cause, an overall evaluation of the circumstances of the individual case is required, weighing up the interests of the franchisor and the franchisee. The termi-nation notice has to be communicated within a reasonable time after the relevant event that led to the friction in the relation-ship. In some cases, it may be recommendable to send a warning letter before terminating the contract with good cause.

If the reasons justifying the dissolution were already fore-seeable before the conclusion of the contract or if these were accepted, a dissolution of the contract for important reasons is not possible.

Within certain limits, it is possible to contractually agree on a catalogue of possible reasons for extraordinary termination.

Generally, in case of an unlimited contract a period of around half a year for an ordinary termination seems reasonable. If the franchisee was obliged to make big investments, he must be given a longer period of termination notice (or the franchisee could claim damages due to the missing amortisation of his investment).



In the case of a comprehensive right of instruction of the fran-chisor, the Austrian courts sometimes consider franchisees to be employees or at least quasi-employees.

on subletting. In addition, there must be an important reason against subletting. The Tenancy Act lists such an important reason demonstratively as one of the following:■ thecompletesublettingoftheexistingproperty;■ sublettingatadisproportionatelyhighsubleaserate;■ if, as a result of subletting, the number of occupants of

a portfolio property exceeds the number of its residential premises; or

■ thereasonableconcernthatthelodgerwoulddisturbthepeace of the house.

If there is a contractual ban on subletting and there is an important reason against subletting, the landlord may request the main tenant to cease subletting.

Irrespective of the question of the permissibility of sublet-ting, this may constitute a reason for termination pursuant to the Tenancy Act.


From a legal point of view, the Austrian real estate market gener-ally provides a high level of protection for tenants, even in the commercial area.

All payments in this regard (initial rent free period, key money, etc.) are subject to the parties’ negotiation and the freedom of contract.

Whether or not key money has to be paid is up to the negoti-ation between the contracting parties.

8 Online Trading


See question 3.5.


There are no limitations on a franchisor being able to require a former franchisee to assign local domain names to the fran-chisor on the termination or expiry of the franchise agreement, if the parties have agreed on such a transfer. Besides, after termination or expiry of the contract, the franchisee might not be allowed to continue using the franchisor’s trade marks online or offline due to general trade mark law.

9 Termination


There is no specific law imposing restrictions that might



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Corporate income tax/withholding taxCorporations are considered as tax residents in Austria if they have their legal seat in Austria or if their effective management is carried out in Austria. Corporate profits are subject to Austrian corporate income tax at a flat tax rate of 25 per cent. However, there is a minimum annual corporate income tax amounting to €1,750 for a GmbH.

Personal income taxIndividuals who are permanently domiciled or resident (staying for more than six months) in Austria are taxable on their world-wide income. Non-residents may also be subject to Austrian income tax to the extent of the income generated in Austria. Austria has entered into more than 80 double taxation treaties with countries to avoid double taxation of income. The rate of income tax is progressive and can rise to 55 per cent of annual gross income.

VATEven if an entrepreneur conducts his business from abroad, certain transactions may be taxable in Austria (notably the supply of goods and services, the intra-EU acquisition of goods, and imports). Where the place of supply of goods or services is in Austria, such supply is, in principle, taxable in Austria as well. The standard VAT rate is 20 per cent, the reduced rate is 10 per cent.


No, there are no such requirements. Nevertheless, it is recom-mendable to include clauses regarding costs of currency exchanges in the franchise agreement.



Individual provisions of the Commercial Agents Act are applied analogously to franchisees under certain conditions according to established Austrian case law. In particular, the claim for compensation pursuant to section 24 of the Commercial Agents Act (HVertrG) is regularly at the centre of disputes. Having its origin in the commercial agency law, this claim is intended to compensate the principal for the advantage he has in building up a permanent customer base via the sales agent even after termi-nation of the contract.

The good will indemnity has to be distinguished from an (additional) possible claim for investments which the franchisee was obliged to make for uniform distribution under the fran-chise agreement and which are neither amortised nor adequately usable at the time of termination of the agreement.

For the analogous application of section 24 HVertrG, it is necessary that the franchisee is integrated into the sales organisation of the franchisor in a similar way to a commer-cial agent. In addition, the franchisee must either be obliged to transfer his customer base to the franchisor upon termination of the contract or there must at least be a de facto transfer of the customer base. The case law developed a catalogue of criteria, which can be relevant in the way of an overall view for the eval-uation of the question of the integration into the sales organisa-tion. According to case law, it is not necessary for all criteria to be cumulative.

This problem only arises where the franchisee is a natural person (sole trader) but not where the franchisee concludes the contract as a legal entity (partnership, corporation).

The term “quasi-employee” refers to service providers who are not employees due to their lack of personal dependency, but who are also not entrepreneurs due to their economic depend-ency or lack of self-employment.

A decisive factor for classification as a quasi-employee is economic dependence. If personal dependence is also added (e.g. mandatory requirements to be personally present for a certain number of hours), there is the risk of the franchisee being classified as a full employee.

The classification of the franchisee as quasi-employee leads, among other things, to the jurisdiction of the labour and social courts in the event of disputes. In addition, individual provi-sions of labour law apply. In the case of classification as an employee, the franchisor might even be confronted with holiday entitlements and entitlement to sick leave. Irrespective of this, provisions of the Commercial Agents Act may neverthe-less continue to be applicable. A possible claim for a good will indemnity is also not excluded (see question 12.1).

In order to avoid such problems, care must be taken to ensure that the franchise agreement is worded accordingly and that it is handled correctly in practice.


Generally, franchisees are self-employed, independent entrepre-neurs who are (usually by contract) not allowed to act on behalf and for the account of their (sub-)franchisor. There is no direct contractual relationship between the franchisor and the fran-chisee’s employees or clients.

Therefore, at least in the vast majority of cases, the fran-chisee’s employees and clients could only claim damages against the franchisor by tort law or product liability.



Currently there are no exchange controls on an overseas fran-chisor. Nevertheless, it is recommendable to include clauses regarding costs of currency exchanges in the franchise agreement.


Usually, there are no tax advantages to structuring payments due from the franchisee to the franchisor as a management services fee rather than royalty for the use of a trade mark or technology. Nevertheless, certain circumstances may give opportunities to reduce taxes. By way of a general overview, the most important and common taxes are as follows:


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In case of a renewal of an existing franchise, no specific disclosure obligations apply that would exceed the franchisor’s obligations for continuous disclosure to existing franchisees regarding infor-mation relevant to the franchisees’ business. See also question 1.7.


There is no right for a franchisee (or a franchisor) to be automat-ically entitled to a renewal or extension of the franchise agree-ment at the end of the initial term, unless the parties agreed on it. The principle of freedom of contract applies. Thus, no party has to give reasons not to renew the franchise agreement.


In case of refusal of renewal or extension of the franchise agree-ment, the franchisee may be entitled to a good will indemnity (see question 12.1).

Additionally, the franchisee may have a claim for investments which the franchisee was obliged to make for uniform distribution under the franchise agreement and which are neither amortised nor adequately usable at the time of termination of the agreement.

Due to the principle of good faith, the franchisee may have a claim regarding investments (besides the one just mentioned) made by the franchisee at the franchisor’s instigation shortly before the termination of the franchise agreement.



It is possible and common to include such restriction in the fran-chise agreement. The franchisor may include a clause which allows him to terminate the franchise agreement in the event of the franchisee’s death or inability to continue the business. It is also possible to make the franchisee’s transfer of ownership in the franchisee entity subject to prior approval of the franchisor.


The mentioned “step-in” right can only be implemented by way

Criteria for such an integration can be, for example:■ Obligationtopromoteandacceptgoods.■ Minimumpurchaserequirements.■ Obligation to maintain an efficient sales and service

organisation and a (minimum) warehouse.■ Obligation to participate in the introduction of new

models.■ Obligationtoparticipateinadvertising.■ Allocationofacontractterritory.■ Notificationandnotificationobligations.■ Controlandbookinspectionrightsofthefranchisor.■ Franchisor’srightofaccesstobusinesspremises.■ Rightofthefranchisortoissueinstructions.■ Non-competitionclause.

At least if the contract is subject to Austrian law, the good will indemnity can neither be limited nor excluded before the legal termination of the franchise contract.

The good will indemnity does not exist, for example, if the franchisee terminates the contract without good cause. Conversely, the claim for good will indemnity may also exist in the event of the expiry of a fixed-term contract or in the event of an amicable termination.

The risk of such an analogous good will indemnity can only be reduced by giving the franchisee more leeway than an inde-pendent entrepreneur and by reducing the control rights of the franchisor.



Both the franchisor and the franchisee have to follow the general principle of good faith. Besides, Austrian courts sometimes also consider a mutual duty of loyalty under the franchise agree-ments. This can lead to an increased duty of care if, for example, the franchisor wishes to allocate a further location which is in the immediate vicinity of an existing franchisee. The franchisor must not obviously damage the franchisee’s business and must, under certain circumstances, at least offer the new location to the existing franchisee.

In the case that one party does not follow the principles of good faith and the mutual duty of loyalty, this party may be liable for damages and such a breach would constitute a reason for dismissal.



There are no franchise-specific laws or regulations. The general provisions of the Civil Code, and the following Austrian laws, govern the franchise agreement from a legal perspective: the Consumer Protection Act; the Act Against Unfair Competition; the Antitrust Law; the Corporate Code; the Trademark Protection Act; and the Copyright Law. In addition, the provi-sion of the Austrian Civil Code concerning general business terms may be of relevance.



Franchise 2021

The qualified electronic signature (as defined in article 3 (12) Regulation (EU) No. 910/2014) is generally equated with the personal signature. With a qualified electronic signature (e.g. citizen card, mobile phone signature), legal or contractual writ-ten-form requirements can basically be fulfilled.

In principle, agreed written-form requirements are also fulfilled by a qualified electronic signature. However, this can be expressly or implicitly excluded by agreement. Please note that such restrictions can be invalid when dealing with initial founders within the meaning of the Consumer Protection Act.


If the existence and the content of the franchise agreement are not in dispute, a scanned version is sufficient. Nevertheless, in regard to court proceedings, it is highly recommendable to keep an original version due to evidence-related issues.



The Coronavirus pandemic offers a great opportunity for fran-chisors to show the quality of their franchise concept and that the backing of a functioning franchise system can be a great advantage for all participants.

Especially in difficult times, you can bring the franchisees even closer to you and convince them of your franchise system. On the other hand, the less the franchisor offers support, the more disturbing it is to franchisees, especially during such a crisis.

In addition, there are great opportunities right now to make your own business model fit for the next 10 years and to expand.

of a purchase option in favour of the franchisor. Generally, the parties can agree to such an option in the franchise agree-ment. Nevertheless, in order to be valid, such an option has to be drafted very carefully. Especially (but not only) in case of insolvency of the franchisee, the option might be void if the amounts agreed on in the franchise cannot withstand a third-party settlement.


A “step-in” right might already be void in many cases. Thus, a (general) power of attorney in favour of the franchisor in this regard is even more likely to be void and not recognised by courts.



Contracts, including franchise contracts, can also be concluded orally. Of course, this is not recommended because of the evidence issues involved. There are no regulations that require a handwritten signature. An electronic signature can also be a valid way of signing a franchise contract.

Like the naming of the issuer in a paper document, the ques-tion of imputability is subject to the assessment of evidence.


32

Dr. Hubertus Thum, LL.M. is a lawyer and certified data protection officer in Vienna, Austria. In addition to franchising and distribution law, his practice focuses on data protection law, unfair competition and marketing law. He is the author of the book Der Ausgleichsanspruch des Franchisenehmers in Europa (‘The franchisee’s good will indemnity in Europe’) and a lecturer at various institutions. He completed his studies in Vienna (Austria), St. Gallen (Switzerland) and Lisbon (Portugal). As a recognised expert on franchising, he also is a member of the Legal Committee of the Austrian Franchise Association.

THUM Rechtsanwaltskanzlei ǀ Law FirmGeusaugasse 17/2.11030 ViennaAustria

Tel: +43 1 361 2222Email: [email protected]: www.thum-law.at

Franchise 2021

Austria

THUM Rechtsanwaltskanzlei ǀ Law Firm is a commercial law firm special-ised in franchising, distribution law, data protection law, unfair competition law, marketing law and litigation. Our sales law practice focuses on inter-national companies that are expanding into or within Austria. The legal support of THUM Rechtsanwaltskanzlei ǀ Law Firm is characterised by flexibility, an understanding of the needs of entrepreneurs and an extensive network of highly qualified lawyers and consultants around the globe. Both start-ups and established companies place their trust in the expertise and commitment of THUM Rechtsanwaltskanzlei ǀ Law Firm.

www.thum-law.at


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Chapter 6 33

Brazil

Daniel Law Guilherme Corrêa Filho

Antonio Curvello

Brazil

registration with any regulator, international franchise agree-ments on the other hand must be recorded at the BPTO for the following purposes: (i) to make the agreement effective against third parties; (ii) to permit the remittance of payments to the foreign party; and (iii) to qualify the licensee for tax deductions. In addition, for the purposes of remuneration remittances, the registration of the agreement at the Brazilian Central Bank (“BACEN”) is also required.


Yes. The main purpose of the BFL is to give transparency to the future franchise relationship and it does so by obligating the franchisor to provide any prospective franchisee with a fran-chise disclosure document (“FDD”), in Portuguese, 10 days before the execution of any binding document/agreement or payment of any amount to the franchisor or other designated recipients.


Yes. The BFL does not make any exception when it comes to the obligation of providing the prospective franchisee or sub-fran-chisee with an FDD 10 days before the execution of any agree-ment or the payment of any amount to the franchisor, master franchisee or other designated recipients. Although the BFL does not specify who is required to make the necessary disclo-sures to a sub-franchisee, it is common practice to assign to the party directly related to it (normally a master franchisee) the performance of such obligation, especially considering that, under article 5, franchisors’ and franchisees’ rights and obliga-tions should be also applied to sub-franchisors and sub-fran-chisees, respectively.


The FDD must be provided to the prospective franchisee in written form, in Portuguese and in a language that is as clear and accessible as possible, to allow the prospective franchisee to have a full understanding of the franchised business, its rights and obligations. The FDD must contain some specific



According to article 1 of Law n. 13,966 of December 26, 2019 (“Brazilian Franchise Law” or “BFL”), franchise is defined as the system by which a franchisor grants to a franchisee the right to use trademarks or other IP rights, always in association with manufacturing rights or exclusive or semi-exclusive distribution rights, along with the right to use the methods and business or operational systems developed or owned by a franchisor against direct or indirect remuneration, without being characterised as an employment relationship with regard to the franchisee or its employees, even the ones in the probationary employment period.


The main Brazilian legislative bill regulating the offer and sale of franchises is the BFL. The Brazilian Civil Code provisions outline principles and set rules concerning the formation, dura-tion and performance of contracts which also apply to fran-chise agreements. Concerning international franchise agree-ments, the Brazilian Patent and Trademark Office’s (“BPTO”) Normative Act 70/2017 requires their recordation before the BPTO for the effectiveness of specific provisions.


The BFL does not differentiate franchise chains with one single unit or franchisee from ones with multiple components. Therefore, disclosure obligations are applied to every franchise relationship in Brazil, regardless of the number of franchisees appointed by the franchisor. When it comes to registration, only international franchise agreements need to be mandatorily recorded before the BPTO.


Yes. Although the disclosure document does not require


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Although non-nationals are perfectly able to own or control a business in Brazil, Brazilian law does impose some legal require-ments to be observed by any legal entity (or individuals) domi-ciled abroad that holds equity interests in a Brazilian company.

For example, foreign entities must be enrolled with the Federal Taxpayer Registry for Corporate Entities and with the BACEN. Also, foreign entities must appoint a Brazilian-resident individual to act as its attorney-in-fact and for receiving summonses on its behalf.

Moreover, there are specific restrictions on the participation of foreign investors in certain sectors and types of company, such as the aerospace industry and cable TV.


The types of companies that are most commonly adopted in Brazil are the limited liability company (“LLC”) and the corpo-ration, since in both the partner’s liability is generally limited regarding the company and third parties.

However, it is noteworthy that the costs of setting up an LLC are less significant than the costs of setting up and main-taining a corporation, as LLCs are not subject to the consider-able expenses of publishing certain relevant corporate acts as corporations are.


Yes, there are several registrations required, at a local, State and Federal level. Registration, licences and formalities normally vary depending on (i) the type of entity to be incorporated, and (ii) its field of activity.

In order to set up an LLC, there are basic licences and authori-sations that companies are required to obtain, regardless of their field of activity, as detailed below:1. Federal Taxpayer Registry for Corporate Entities of the

Foreign Investor (for the foreign partners of the Brazilian company).

2. Registration of the articles of association with the Trade Board that will generate the identification number of the Registry of Companies.

3. Federal Taxpayer Registry for Corporate Entities of the Brazilian Company.

4. State Taxpayer Registry for Corporate Entities.5. Municipal Registry and Operating Permit.6. Social Security Registration.

3 Competition Law


Law n. 12,529/2012 (the “Competition Law”), effective as

information, detailed in article 2 of the BFL, related to the fran-chisor, the business operation and other required conditions to be a franchisee. Although not mandatory, we recommend, at least, an annual update of the FDD. There are no legal statutes requiring continuing disclosure to existing franchisees.


The scope of the FDD is to give the prospective franchisees all of the necessary information related to the business and the franchising model, so that they can make a well-grounded deci-sion on whether or not to enter the franchising system.

Under BFL, if a pre-sale obligation is not disclosed, the fran-chisee may request the nullity of the agreement and the return of the entire amount of royalties already paid. However, in prac-tice, the consequences of not disclosing pre-sale obligations will depend on their type and the prospective franchisee’s level of sophistication. If such obligations are minor and not burden-some to the franchisee, we do not envision severe consequences to the agreement. However, in extreme cases, if such obliga-tions alter the financial equation of the relationship and impose additional expenses to the franchisee for instance, the provi-sions of the BFL could be applied and the agreement could be considered null and void and the franchisee could also claim reparation for damages and losses that this lack of information disclosure may have caused.


The franchised trademarks must be, at least, filed at the BPTO before a franchise may be offered and/or sold in Brazil. The trademarks do not necessarily have to be granted by the BPTO, but must at least be filed there.


Although not mandatory, franchisors and franchisees may join the Brazilian Franchise Association (“ABF”), which is the most representative entity for the franchising sector.


The payment of a membership fee is the most relevant obliga-tion imposed on franchisors. For more information, please go to www.portaldofranchising.com.br.


The BFL provides that the FDD must be provided in Portuguese.Regarding the franchise agreement, the BFL requires that

local franchise agreements be written in Portuguese, while international agreement may be written in a foreign language, provided that a sworn translation is given to the franchisee at the franchisor’s expense.


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or uses, without authorisation, confidential knowledge, infor-mation or data usable in industry, commerce or the providing of services, except that which is of public knowledge or which is obvious to a person skilled in the art, to which he has had access by means of a contractual or employment relationship, even after the termination of the contract, shall be deemed to have committed a crime of unfair competition practice.


No, there is no legal limitation related to the term of franchise agreements. However, as international franchise agreements must be submitted for recordation at the BPTO, it is important to have in mind that, for recordation purposes, the franchise agreement must have a specific term, it cannot be an indefinite term.

Such term can be a specific date jointly stablished by the parties or can be linked to the validity term of the licensed trade-mark registrations and further renewals.


No, there is no legal limitation related to the agreements executed between franchisors and the suppliers of the franchise network.


According to the BFL, there are no express provisions restricting the franchisor’s ability to impose minimum resale prices. However, said minimum resale prices must be carefully analysed, so that they are not considered abusive under Brazilian law and do not undermine the franchisee’s ability to compete in the market. Also, it is important that no particular advantage is given to any franchisee that would unreasonably privilege it to the detriment of others.


There are no legal restrictions related to the offering of fran-chises in adjoining areas or streets. However, if any rights are given to the prospective franchisee in respect to an adjoining territory and the franchisor does not comply with it, this may be interpreted as a breach, which could lead to an early termination of the agreement.

In that regard, the BFL determines that the franchisor discloses to prospective franchisees whether the franchisee is guaranteed exclusivity or a right of first refusal over any partic-ular territory or activity and, if so, under what conditions. The BFL also requires that the FDD provides if it is possible or not for the franchisee to sell or export products and services outside of the territory.


Non-compete covenants (which also include non-solicitation

of May 29, 2012, regulates competition in Brazil and estab-lishes rules concerning the abuse of a dominant position. The Competition Law lists those anticompetitive practices that may constitute a breach of the economic order and, therefore, may have an impact on franchise agreements.

The following provisions may have relevance in a franchise agreement:1. limiting or restraining market access by new companies;2. creating obstacles for the establishment, operation or devel-

opment of a competitor company or supplier, purchaser, or financier of a specified product or service;

3. imposing on distributors, retailers or representatives of a specified product or service retail prices, discounts, payment conditions, minimum or maximum volumes, profit margins or any other marketing conditions;

4. refusal to sell products or services normally available for sale; and

5. tying the sale of one product to the acquisition of another or to the use of an additional service.

The Administrative Economic Protection Counsel (“CADE”) is the administrative government body competent for exam-ining and assessing the occurrence of actions that may impair or limit free competition or result in the control of significant market shares.

Anticompetitive practices, especially the provisions listed above, are only characterised as such in the event that they are likely to unjustifiably limit competition, concentrate economic power, dominate markets, arbitrarily increase profits or impose abusive practices. In light of the above, CADE considers specific aspects such as the peculiarities of the business, the product or service involved, the size of the market, the commer-cial sector and the nature of the transaction. Franchise agree-ments have been considered pro-competitive and the restric-tions usually imposed are intended to protect the network.

Since international franchise agreements must be submitted for recordation with the BPTO, the governmental agency’s approval can be considered a prima facie confirmation that the franchise agreement complies with the antitrust regula-tions, because if this were not the case, the BPTO should have forwarded the agreement to CADE for analysis prior to its regulation.

As mentioned above, the Competition Law lists the anticom-petitive practices that may constitute a violation of the economic order and therefore should be considered by the franchisor when enforcing the agreement. As a result, tying provisions (those that fix the price of products commercialised by franchisees, estab-lish supply arrangements, or make compulsory the acquisition of certain products due to specific standards of quality) may be considered admissible in the context of rule of reason. They may be abusive and their validity may be questioned if such restric-tions are unduly enforced by the franchisor without reasonable-ness. For instance, extending the franchisee non-competition obligation to non-competing goods could be construed as anti-competitive practice, depending on the circumstances.

CADE may authorise certain contractual restraints provided that: (i) they are intended to increase productivity, quality of goods/services and/or generate technological or economic effi-ciency and development; (ii) the resulting economic benefits are equitably distributed among the participants in the contract on one side, and the consumers on the other; (iii) they do not cause the elimination of a substantial number of competitors from the relevant market of goods/services; and (iv) they are limited to the extent necessary to the fulfilment of their goals.

Further, Law n. 9,279/96 (the “Brazilian Industrial Property Law”), which regulates rights and obligations relating to indus-trial property, sets forth that the party who discloses, exploits


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Our comments at question 5.1 above also apply to sub-franchising. Therefore, the franchisor is fully responsible for compliance with the disclosure obligations in connection to its master franchisee and, similarly, the master franchisee will be responsible for the compliance of the disclosure obligations and possibly for pre-contractual misrepresentation in connection with its sub-franchisees in Brazil. Regarding pre-contractual misrepresentation, please refer to question 5.3 below.


As a general rule, disclaimer clauses cannot avoid liability under Brazilian law. The existence of liability caused by pre-contractual misrepresentation would be analysed by the local Courts, on a case-by-case basis, according to the principle of bona fide that regulates all relationships, including in the pre-contractual phase.


Class actions are only available in Brazil when damages are caused to the general public with respect to issues such as consumer rights, the environment and public order. Furthermore, only a handful of entities can file such Court actions – mainly Public Prosecutors, the State, the Brazilian Bar Association and Class Associations.

Therefore, class actions cannot be brought to discuss strictly private conflicts, such as those arising out of a franchise agreement.

In any event, considering that common and collective rights can be asserted regardless of any contractual provisions, a class action waiver clause would not be enforceable in Brazil.

6 Governing Law


In international franchise agreements, the new BFL allows the franchisor and the franchisee to choose from either of their domicile’s jurisdiction.

This provision comes to settle a former controversy, as the previous law was silent on that regard. Although several court decisions ruled in favour of a foreign jurisdiction-electing clause, the new BFL comes to solidify this possibility, but not without a twist. The law allows the franchisor and the franchisee to select the jurisdiction of either of the parties’ domicile. So, in theory, the not so uncommon hypothesis of selecting a neutral jurisdic-tion is no longer accepted under the new BFL.

of customers) are very common in franchise agreements in Brazil. Although Competition Law establishes that any act that obstructs the establishment and operation of businesses in the local market is an infringement of the economic order, covenants that prohibit franchisees from competing directly or indirectly with the franchisor during or after the term of the franchise agreement are legally valid and enforceable due to the special features of a franchised business. Nevertheless, the BFL requires the franchisor to disclose in the FDD such non-compete rules that would apply between franchisor’s own units and the franchisee.

Considering the relevancy of e-commerce for any business today, it is important to disclose any limitation that franchisees may face when selling their goods and services online.



Brazil adopts a first-to-file system. Because of that, any trade-mark whose right of use is granted by the franchise agreement must be registered or at least be subject to a pending applica-tion with the BPTO. The franchisee will only have rights to use the franchised trademarks if the franchise agreement is in force. Once the agreement is terminated or has expired, the franchisee does not hold any rights over the trademark.


Yes. Know-how, trade secrets and confidential information are entitled to intellectual property protection in Brazil under unfair competition rules, as per article 195 of the Brazilian Industrial Property Law.


Yes. Operations manuals can be subject to protection under Brazilian Copyright Law (Law n. 9,610/1998). Computer programs on their end are also protected by copyright, as expressly established in Brazilian Software Law (Law n. 9,609, dated February 19, 1998).

5 Liability


Failure to deliver the FDD within the term established or the delivery of the FDD with false information or missing any mandatory franchise information, by the BFL, entitles the fran-chisee to seek the cancellation of the franchise agreement and the refund of any and all monies paid by franchisee to fran-chisor, or to any third party indicated by the franchisor, as fran-chise fees and royalties (duly updated) plus damages.


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of Law n. 9,307/96 (“Arbitration Law”); this establishes that, in “take it or leave it” agreements, the arbitration clause would only be valid if it is written in bold or as an attachment document to the agreement, where the parties can specifically express their consent by inserting their signature or initial next to the arbi-tration clause.

7 Real Estate


Based on article 51, II of Law n. 8,245/1991, commercial prop-erty is normally leased for a period of five years.

Moreover, unlike the previous statute, the new BFL recog-nises the possibility of the franchisor to sublet a unit location to the franchisee and even profit from it.

However, the law provides two conditions: (i) the additional amount charged by the franchisor must be provided in the FDD; and (ii) such additional amount must not represent an excessive burden to the franchisee.

Lastly, article 3 extends to the franchisee the franchisor’s right to demand in Court the renewal of the main lease agree-ment. This franchisor’s right is granted by Brazilian Leasing Rental Law (Law n. 8,245/91), in the quality of tenant. In every commercial leasing agreement with a period of more than five years, the tenant has the right to request the automatic agree-ment’s extension to protect its business. With the new BFL, the lawmaker wanted to protect the franchise unit, by extending this right to the franchisee. The only exception is if the franchisee is in breach of either the sublet or franchise agreement.


From a legal perspective, there is no impediment to include a conditional lease assignment in the lease agreement. But, based on our experience, this assignment is seldom negotiated and might not be readily accepted by some landlords (especially in the case of shopping malls).

However, if the parties agreed to such condition in the lease agreement, it will be duly valid and enforceable under Brazilian law.


There are no legally established restrictions for non-national enti-ties to hold any interest in properties located in urban areas, with the exception of properties owned by the Federal Government, where the authorisation of the President is required.

However, the same cannot be said about properties located in rural areas. In this regard, Law n. 5,709/71, Decree n. 74,965/74 and Normative Act 76/2013 from the National Institute of Land Reform (“INCRA”) must be noted, as they establish some restrictions and conditions for a non-national to become the owner of rural properties.


Brazilian local Courts do provide a remedy for interlocutory relief in case of urgent matters related to franchise, especially involving the use of trademarks after termination, intellectual property, unfair competition practices, repossession of inven-tory and equipment (if relevant) and non-compete covenants.

The number of available tools increased as of March 2016, when Brazil enacted a new Civil Procedural Code. One of the new and most efficient options is to file an autonomous and ex parte request for a preliminary injunction that, if granted, may lead to the immediate closure of the case if the defendant fails to appeal in time. In the case that the defendant appeals, the plain-tiff has a 15-day term to file a full claim.

However, in order to obtain a fast response from the Courts, it is necessary for the parties to choose Brazilian law and juris-diction to govern the agreement.

Although the Brazilian judicial system does recognise the validity of foreign decisions, in order to be locally enforceable, they need to go through a homologation proceeding before the BrazilianSuperiorCourtofJustice,whichisrathercomplexandtime-consuming.

Among the main requirements to be complied with are: (a) the parties must prove that the decision attends to all legal formali-ties; (b) the decision must be final, with no possibility of further revision; (c) it needs to be notarised by a Brazilian Consul in the country where it was delivered and translated into Portuguese; and (d) in addition, in order to receive the exequatur from the Superior Court of Justice, the foreign decision cannot becontrary to Brazilian public order and local practices. Although the case should not be retried, the approval of the decision may take some time locally.

Such homologation procedure currently takes several months if the decision complies with all procedural requirements of the rendering country. Once homologated, such decision is then forwarded to the Federal Court in the State where the defendant has its headquarters to begin its enforcement procedure, which usually also takes several months, in some cases even years, depending on the complexity of the case.


BrazilratifiedtheNewYorkArbitrationConventiononJuly24,2002 with Legislative Decree n. 4,311.

Since then, the number of conflicts subject to arbitration has been sharply increasing in Brazil over the last decade and even the new Brazilian Civil Procedure Code of 2016 now encourages parties to find alternative means of dispute resolution.

The parties are free to elect the set of arbitration rules that better suits their interest.ItisnoteworthythattheSuperiorCourtofJustice,ina2016

decision, recognised that a franchise agreement is a “take it or leave it” agreement, and ruled that an arbitration clause may be declared invalid if it does not comply with article 4, paragraph 2


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In connection to indefinite term agreements, 90 (ninety) days’ prior notice is required for terminating the agreement.

On the other hand, regarding fixed-term agreements, which is the most common choice in franchising, the franchise agree-ment will terminate upon expiration of its contractual term. Although the parties may stipulate that it will not be neces-sary to take any specific action to terminate the franchise agree-ment in this case, it is advisable to send a proper notice for post-termination obligations.

Also, it is important to stress that article 473 of the Brazilian Civil Code establishes, as a rule for termination of agreements, that if any of the parties has made significant investments for the execution of the agreement, the unilateral termination will only be effective after the agreement has been in force for a term compatible with the nature and amount of such investments. If the termination conflicts with such provision, the Brazilian Courts may (i) set an additional term for the agreement to remain in force, or (ii) set a specific amount of compensation if the conflict between the parties renders an extension unfeasible.



It is relatively common for a franchisee’s employees to insert the franchisor as a co-defendant in labour actions. However, Labour Courts have consistently ruled that franchisors are neither jointly nor secondarily liable, provided that they refrain from directly intervening in the business administration of the franchisee. In a typical franchise agreement, there is no hierarchical subordina-tion of the franchisee’s employees in relation to the franchisor.

Notwithstanding, to minimise risks it is recommended that the franchise agreement expressly contains a clause of non-responsibility of the franchisor with respect to the labour and tax activities of the franchisee.


The franchisee is directly responsible for its employee’s acts or omissions, as defined in article 932, III of the Brazilian Civil Code.

Nevertheless, from a consumer protection perspective, it is worth mentioning that the Brazilian Consumer Code (“CDC”) sets forth a joint and strict liability of all the parties involved directly or indirectly in the supply chain of products and services to consumers.

Hence, the franchisor could be deemed liable towards end-consumers for acts of the franchisee.

On the other hand, if the franchisor is held liable and responsible for repairing damages caused by defective goods, article 88 of the CDC grants to the franchisor the right to recover from the fran-chisee the amount of damages paid to consumers, as long as the franchisee was the party directly responsible for the infringement.

In any event, it is recommended that the franchise agreement expressly foresees that the franchisor will not be responsible for any act or omissions by the franchisee or its employees.


After the real estate market boom in Brazil until 2012, prices significantly dropped in the following four years and are now facing stagnation. Based on this commercial scenario, although it is not a common practice, some landlords have exception-ally accepted the negotiation of an initial rent-free period when entering into a new lease agreement.

Although not expressly authorised by Law n. 8,245/1991 (which is the Law that regulates lease agreements in Brazil), our local Courts have the understanding that shopping malls, acting as landlords, are authorised to demand payment for res sperata, which may be understood as “key money”, a precedent condi-tion for the execution of the lease agreement for the mall.

8 Online Trading


Considering that the BFL is not intended to govern the private franchisor-franchisee relationship, and given the lack of legal impediment, it is possible to establish contractually such binding re-direction requirement. However, such rule must be provided in the FDD.


Provided that the domain names registered by the franchisee are directly related to the franchise business and/or franchisor’s IP rights, there are no limitations on contractually imposing the assignment of local domain names to the franchisor, provided that such obligation is provided in the FDD.

9 Termination


There are no mandatory local laws that might override the termi-nation rights typically detailed in franchise agreements.


A different set of rules applies depending on whether the fran-chise agreement has a fixed term or an indefinite period.


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can be either a person without employment ties or a corpo-rate, of a third-party business with the purpose of seeking new clients. In other words, the agent acts on behalf of a company to seek new clients and receives a commission for its services.

Conversely, franchise relationships are much more complex than agency relationships, since franchising normally involves the granting of several rights to the franchisee, as well as the transferring of know-how.

Therefore, a real franchise operation would hardly be consid-ered an agency in Brazil, since both commercial structures are ruled by specific laws and there are fundamental differences between them.



The general rules and principles laid down by the Brazilian Civil Code concerning the negotiation and execution of agreements, including the post-contractual obligations, also apply to fran-chise agreements.

Articles 113 and 422 of the Brazilian Civil Code provide that all agreements are subject to the principles of good faith. Beyond the obligation not to harm, according to the principle of good faith, it is legally expected that the parties cooperate with one another with fairness, mutual trust, transparency and honesty during all phases of the transaction in order to ensure that the other party fully understands what is being negotiated and obtains the expected results.

The observance of good faith clearly drives the offering stage of franchise transactions, where the franchisor is obliged to provide prospective franchises with an FDD, providing the main information on the franchised business in detail.

The standards of the principle of good faith shall subsist through all phases of the transaction and even survive termi-nation, which means that the contracting parties must observe and act in accordance with such standards during negotiations, before and during the term of the agreement, as well as after its termination.



As mentioned above, the BFL is not intended to govern the relationship between franchisor and franchisee. Thus, after the franchise agreement is executed, the franchisor-franchisee relationship will mostly be regulated by the franchise agree-ment itself, according to the general rules and principles of the Brazilian Civil Code.



There is no mandatory renewal in franchise agreements. The parties are free to include renewal conditions in the franchise



International franchise agreements must be recorded with the BPTO and BACEN to allow payment of franchise fees and royalties to parties outside Brazil.

As a rule, the parties may freely set out the percentage of remuneration insofar as it stays within the price commonly prac-tised in the respective field and in the national and international market. The remuneration may be established as a percentage of the net sales or by means of a fixed amount based on each unit produced.

Nevertheless, royalties involving subsidiary and parent companies are limited by the corresponding ceiling of fiscal deductibility specified by Ministerial Ordinance n. 436/58, which varies between 1% and 5% of the net sales of contractual products, depending on the field of activity involved.


The Withholding Income Tax (“IRRF”) will always apply on royalties paid in consideration for the right to use the whole franchise system, comprising the trademark licence and the technology transfer.

The IRRF is levied at a general tax rate of 15% of net reve-nues, which may be higher or lower depending on where the franchisor is resident or domiciled (e.g. in a tax haven or jurisdic-tion with which Brazil has executed a double taxation conven-tion), and the foreign franchisor is the legal entity responsible for payment (taxpayer).

However, the IRRF is withheld by the BACEN whenever the franchisee remits any royalty abroad. So, in practice, the franchisee collects IRRF on behalf of the franchisor (taxpayer). However, the financial burden for such tax may be contractually shifted, by means of a gross-up clause.

The abovementioned rule for IRRF over royalty payments also applies to the payment of a services fee, whatever its nature.


Brazilian law authorises franchise agreements to determine that royalties will be paid in foreign currency.



Agency agreements are strictly regulated by Law n. 4,886/65 (with amendments introduced by Law n. 8,420/92) and by specific provisions of the Brazilian Civil Code. The main char-acteristic of agency agreements is promotion by the agent, who


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Although there are no registration requirements or other formal-ities that must be complied with for the enforceability of “step-in” rights duly detailed in the franchise agreement, a power of attorney (“PoA”) in favour of the franchisor could be granted by the franchisee through the franchise agreement, as long as said PoA is granted for specific and determined rights. There is no additional registration or formalities to be observed to ensure the validity of said PoA. However, PoA can be revoked at any time by the grantor. So, from a practical point of view, although it is possible to include in the franchise agreement a PoA in favour of the franchisor, the franchisee has the right to revoke it at any time.



Yes; although not very much used in franchise agreements, electronic signatures are accepted and used in Brazil in a wide variety of agreements, such as lease agreements.

However, the main issue remains the ability to validate the authenticity of the parties’ e-signature. To counter that, despite not being mandatory, it is advisable that the Brazilian party e-signs the agreement by means of a certified digital signature issued by organisms accredited at the Infrastructure of Brazilian Public Keys. This digital signature confers a presumption of validity of the e-signature, as per article 10, paragraph 1 of Executive Order n. 2,200-2/2001.

Further, although electronic signatures are accepted and effec-tive between the parties, for recordal purposes, the BPTO has not formally regulated this issue. Instead, BPTO’s expressly requires, in its internal regulations, that, to be accepted, the signature of the foreign party in a franchise agreement has to be notarised and further apostilled before a local notary public. This procedure would only be possible for physically signed documents.


Although most Brazilian Courts have adopted an online system, we do not recommend destroying the paper version of agree-ments because the parties may be requested, during the course of the action, to present the original agreement if the authen-ticity of the “wet ink” signature is challenged and an expert report is required.

business, if any. However, once such conditions apply, they must be disclosed in the FDD, which must also contain a draft of the franchise agreement and of any preliminary agreement.


No. Considering that there is no mandatory renewal in fran-chise agreements, there is no overriding right for a franchisee to be automatically entitled to a renewal or extension of the fran-chise agreement.


The BFL does not regulate the relationship and, therefore, it does not deal with any breach, non-renewal or other reasons for termination. Considering that the law does not require manda-tory renewal, if the franchise agreement does not provide for automatic renewal, it will end upon expiration of the term set by the parties. If the agreement provides for automatic or condi-tional renewal, those provisions will prevail.



Yes. As franchises are deemed intuitu personae agreements, the franchisor may impose restrictions on a franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business.

The franchisor is also able to include conditions in the agreement, i.e. the franchisor’s prior approval required for the transfer of assets or equity, or even the franchisor’s ability to prevent it from happening at all. The main purpose is to main-tain the administration and guidance of the franchisee business as initially agreed with the franchisor.


As long as such “step-in” right is detailed in the franchise agree-ment, it will be recognised by Brazilian law and, consequently, it will be enforceable in Court. In practical terms, if the franchisee business is based on a lease agreement, said “step-in” rights must be detailed both in the franchise and lease agreements to guar-antee that the landlord agrees to the assignment of the lease to the franchisor. There are no registration requirements or other formalities that must be complied with for enforceability purposes.


41Daniel Law

Franchise 2021

It worth mentioning that, under Brazilian law, the pandemic might be considered an event of force majeure, if it meets some specific requirements established in the Brazilian Civil Code and, for such purpose, it can justify the non-compliance of some contractual obligations by either of the parties. In this event, a party cannot be liable for any damage caused to the other party.

This might be an opportunity for franchises to develop their e-commerce operation, as the online offering of products and services is an alternative to allow companies to continue oper-ations, while their facilities and stores are closed, during the confinement period.

It is also important to highlight that several commercial banks have opened lines of credit with a special condition for the fran-chising sector to help businesses cope financially in this period of crisis.



The confinement measures, adopted in several States during the coronavirus pandemic, to contain the spread of the virus, might directly jeopardise the business operations of franchises in Brazil. This may, consequently, impact the franchisee’s capa-bility of complying with certain contractual obligations during this period. Depending on the field of activity this impact could be higher, as some specific services had to be interrupted during the confinement. To prevent further prejudice for the parties, it is important that, during the pandemic, franchisor and fran-chisee work together to renegotiate some specific terms of the agreement.


42

Antonio Curvello has worked in intellectual property for five years, and joined Daniel Law as a partner in the Licensing and Business Transactions Department in 2017. His experience covers all aspects of intellectual property, with a particular emphasis on contracts and transactions involving franchising, technology transfer, trademarks, copyright, industrial design, patents, research and development and plant varieties. Moreover, Antonio also handles the analysis and drafting of commercial agreements and related transactions, such as agency and distribution. He is experienced in copyright protection and software registration.Antonio gained his academic Law degree from Rio de Janeiro Federal University (“UFRJ”) and holds a Master’s in Law degree in Intellectual Property Law – Design Law from Université Lumière Lyon 2.Antonio is a member of the Brazilian Bar Association.

Daniel Law330 República do Chile Ave. 21st Floor West TowerRio de Janeiro, RJ, 20031-170Brazil

Tel: +55 21 2102 4330Email: [email protected]: www.daniel-ip.com

Franchise 2021

Brazil

Guilherme Corrêa Filho has been working in intellectual property since 2015, when he joined Daniel Law. He is a member of Daniel’s Licensing and Business Transactions Department and is experienced in reviewing and drafting commercial agreements. He also handles cases involving technology transfer, intellectual property rights licensing, such as trademarks, patents and industrial designs, and fran-chising. His experience also covers copyright protection and software registration.Guilherme is a member of the Brazilian Bar Association.

Daniel Law330 República do Chile Ave. 21st Floor West TowerRio de Janeiro, RJ, 20031-170Brazil

Tel: +55 21 2102 4228Email: [email protected]: www.daniel-ip.com

Daniel is a firm which respects your particular needs and provides legally-wise business solutions. Our diverse team of over 220 partners, attorneys, engineers and other professionals is uniquely equipped with the legal and technical expertise, and real-world business experience, needed to develop and execute the customised strategies that meet the specific IP needs of our clients’ portfolios. Beyond understanding the nuances of IP law, we understand the jurisdiction. Our deep and native knowledge of Brazil’s complex legal environment enables Daniel to better anticipate the needs of our clients, understand the potential risks they face, and, ulti-mately, provide more successful management of their IP assets.

www.daniel-ip.com


Franchise 2021

Chapter 7 43

Canada

Dentons Canada LLP

John Papagiannis

Helen Fotinos

Canada

Stacy Shields

distributed or securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee.

When assessing whether a business constitutes a franchise, attention is required as the definition is very broad and can often capture other business formats not traditionally considered or intended to operate as a franchise, such as distributorships or simple licence arrangements, for example.


In Canada, the offer and sale of franchises is governed by general contract law principles and, where applicable, the franchise stat-utes enacted in the six Regulated Provinces. To be enforceable, a franchise agreement must meet the standard requirements for the enforceability of commercial contracts.

In the Regulated Provinces, while there are subtle differences among the provincial franchise statutes, they are substantially the same, focusing primarily on pre-sale franchise disclosure, and the manner in which the parties perform and enforce rights afforded to them under the franchise agreement. Significant areas of regulation include the following:(i) Pre-Sale Disclosure Obligations: A franchisor granting

franchises in a Regulated Province must provide prospec-tive franchisees with a franchise disclosure document (“FDD”) not less than 14 days before the earlier of the signing of the franchise agreement or any other agreement relating to the franchise, excluding confidentiality, non-dis-closure and site or territory allocation agreements which are permitted, and the payment of any consideration by the franchisee to the franchisor or the franchisor’s associate, excluding the payment of a deposit, provided it does not exceed the prescribed amount (20% of the franchise fee of a maximum of $100,000), is fully refundable without deduc-tions, and is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agree-ment. The FDD must contain all material facts, including material facts prescribed, the franchisor’s financial state-ments, and all other facts which can be reasonably expected to have a significant impact on the value of the franchise or the franchisee’s decision to purchase the franchise.



Franchising is regulated at the provincial level in Canada; there is no federal franchise legislation. To date, only six provinces have enacted independent franchise legislation. These provinces are: British Columbia; Alberta; Manitoba; Ontario; Prince Edward Island; and New Brunswick (the “Regulated Provinces”). While there are subtle differences between the franchise statutes of the Regulated Provinces, the definition of what constitutes a “fran-chise” is generally consistent, and includes the following key features:

“Franchise” means a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, to the franchisor, or the fran-chisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing opera-tions, and in which:(i) the franchisor grants the franchisee the right to sell or

distribute goods or services that are substantially associ-ated with a trademark, trade name, logo or advertising or other commercial symbol that is owned by or licensed to the franchisor or the franchisor’s associate;

(ii) the franchisor or the franchisor’s associate has the right to exercise or exercises significant control over, or has the right to provide or provides significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organisation, marketing techniques or training;

(iii) the franchisor, or the franchisor’s associate, grants the franchisee the representational or distribution rights, whether or not a trademark, trade name, logo or adver-tising or other commercial symbol is involved, to sell, offer for sale or distribute goods or services supplied by the franchisor or a supplier designated by the franchisor; and

(iv) the franchisor, or the franchisor’s associate, or a third person designated by the franchisor, provides location assistance, including securing retail outlets or accounts for the goods or services to be sold, offered for sale or


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As a general rule, where the elements in the definition of a “fran-chise” are satisfied, the applicable provincial franchise laws will apply. However, with the exception of Alberta, the other Regulated Provinces exempt business arrangements between a franchisor/licensor and a single licensee where the licence granted to use a specific trademark, logo or other commercial symbol is the only licence of its general nature and type.


There are no registration requirements in Canada related to FDDs, franchise agreements or franchise systems. However, depending on the concept, the franchise may be subject to regis-tration requirements under other laws.


Yes, each of the six franchise statutes in the Regulated Provinces imposes express pre-sale disclosure obligations on franchisors.

A franchisor granting franchises in one of the Regulated Provinces must provide a prospective franchisee with an FDD not less than 14 days before the earlier of: (i) the signing by the prospective franchisee of the franchise agreement or any other agreement relating to the franchise, excluding confidentiality, non-disclosure and site or territory allocation agreements which are permitted; and (ii) the payment of any consideration by or on behalf of the prospective franchisee to the franchisor or franchi-sor’s associate relating to the franchise, excluding the payment of a deposit, provided it does not exceed the prescribed amount (20% of the franchise fee of a maximum of $100,000), is fully refundable without deductions, and is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement.

The FDD must be presented as a single document, at one time and must contain all agreements related to the franchise and all material facts prescribed by the provincial franchise statutes, as well as any other information that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the prospective franchisee’s decision to acquire the franchise.

Additionally, the FDD must also include the franchisor’s financial statements prepared in accordance with prescribed accounting principles in either an audited or review engage-ment form for its most recently completed fiscal year, unless an exemption is available to the franchisor. Each of the Regulated Provinces makes available to large, mature franchisors, who satisfy the requirements prescribed by the provincial franchise statutes, an exemption from the requirement to disclose their financial statements.

Once all material facts have been compiled, the franchisor must swear a certificate certifying that the FDD is compliant with the applicable franchise statute(s), contains all material information and contains no misrepresentation. The FDD may then be delivered to the prospective franchisee, who is required to sign and date an acknowledgment of receipt of disclosure, the date of which will trigger the mandatory 14-day waiting period before the franchisee may sign the agreement or pay the fran-chisor or a franchisor’s associate any consideration (other than a deposit as prescribed) in respect of the franchise opportunity.

If a “material change” occurs between the delivery of an FDD and the signing of the franchise agreement or the payment of consideration, a franchisor must either re-disclose with a fresh FDD or provide the prospective franchisee with a Statement of

(ii) Duty of Fair Dealing: Each party to a franchise agreement is subject to a statutory duty of fair dealing in respect of the performance and the enforcement of rights afforded to them under the franchise agreement. With the excep-tion of the province of Alberta, the duty of fair dealing is defined to include the duty to act in good faith and in accordance with reasonable commercial standards.

(iii) Right to Associate: Every franchisee is granted a statutory right to associate with other franchisees for the purposes of forming or joining an association of franchisees, and the franchisor is expressly prohibited from interfering with or restricting such efforts or activities in any way.

(iv) Non-Waiver: All Canadian franchise legislation expressly prohibits parties to a franchise agreement from contracting out of or waiving any of the rights or duties prescribed by the provincial franchise statutes.

(v) Remedial Rights: Franchisees are afforded a statutory right to rescind the franchise agreement without penalty or obli-gation within: (a) 60 days of receiving the FDD if the fran-chisor failed to provide the FDD within the prescribed time or if the FDD was deficient in some way; or (b) two years if the franchisor never provided an FDD. Courts have expanded the application of the two-year limitation period to instances where an FDD is provided; however, the deficiencies are so egregious that they amount to the equivalent of no disclosure.

In addition to rescission rights, franchisees are also afforded a statutory right of action for damages for breach of the right to associate, breach of the duty of fair dealing, and for mis-representation by the franchisor.

QuébecWhile there is no specific franchise legislation in force in Québec, the Civil Code of Québec (“CCQ”) may impose substantive obliga-tions on franchisors. Under the CCQ, “external clauses” imposing contractual terms and conditions found in separate documents outside the franchise agreement (such as operating manuals, for example) must be brought to the attention of prospective franchi-sees at the disclosure stage in order to be enforceable against fran-chisees. Similarly, the Québec Court of Appeal has held that the duty of good faith under the CCQ requires a franchisor to bring to the attention of a prospective franchisee any information that might have a decisive impact on the prospective franchisee’s willingness to enter into the franchise agreement, or proof that the prospec-tive franchisee otherwise has knowledge of the relevant informa-tion (9150-0595 Québec Inc. v. Franchises Cora Inc., 2013 QCCA 531). To help mitigate their exposure and enforce the validity of external clauses, franchisors are encouraged to obtain an acknowledgment from prospective franchisees confirming that they received and reviewed the relevant external clauses and ancillary documents.

Once a franchise agreement is executed, the CCQ may also impose substantive “implied” obligations on franchisors, beyond the written terms of the contract. Québec courts have applied the CCQ to recognise and read into franchise agreements far-reaching implied duties, including: a duty to inform; a duty to cooperate and collaborate; a duty of loyalty; a duty to respect the other party’s reasonable expectations; and a duty to treat parties in similar situ-ations equally and to exercise one’s rights reasonably, among other duties. The Québec courts have applied these implied duties to sanction inappropriate conduct by franchisors, even where the franchise agreement did not expressly prohibit the specific conduct.



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requirements may be confronted with a claim for statutory rescission.

Statutory rescission is the primary remedy available to a fran-chisee who fails to receive an FDD or who receives a deficient FDD. Rescission gives the franchisee the right to terminate all franchise and ancillary agreements with the franchisor without penalty or further obligation, and to financial compensation for damages sustained.

The financial compensation available to a franchisee includes: (i) reimbursement of all monies paid to the franchisor; (ii) reim-bursement of all monies paid to the franchisor for inventory, supplies and equipment; and (iii) compensation for any other net losses incurred in acquiring, setting up and operating the fran-chise. In Alberta, only these “net losses” are recoverable.

The applicable limitation period during which a franchisee may seek rescission depends on the severity of the deficiency in the FDD. There is a 60-day limitation period for minor, non-material deficiencies, and a two-year limitation period for serious deficiencies or if no FDD was provided.

A franchisee who suffers a loss because of a misrepresentation contained in an FDD, or in a Statement of Material Change, or as a result of a franchisor’s failure to comply with pre-sale disclo-sure obligations, is also afforded a statutory right of action for damages as a result of the misrepresentation or non-compliance by the franchisor. The franchisee will be deemed to have relied on the misrepresentation and information contained in the FDD. However, a franchisor will not be liable to a franchisee in an action for misrepresentation where the franchisor can prove that the franchisee acquired the franchise with knowledge of the alleged misrepresentation.

The franchisor and the franchisor’s associates may be held jointly and severally liable in respect of an action brought for non-compliance with statutory disclosure obligations, misrepre-sentations and/or breach of the duty of fair dealing.


No, other than complying with the franchise statutes, and accompanying regulations, in the Regulated Provinces, there are no other requirements that must be met before a franchise may be offered or sold.


No, membership in a national franchise association is not manda-tory. However, franchisors and franchisees may find participa-tion in such associations beneficial. In Canada, the Canadian Franchise Association (“CFA”) serves as the voice of the fran-chise industry and seeks to educate the public and government on the value of the franchise business model as a vehicle for economic growth. The CFA also provides its members with access to a network of business and legal resources which fran-chisors and franchisees may find valuable. Additionally, often membership in such national associations enhances the cred-ibility of the franchise system, allowing franchisors to attract more and better quality prospects.


Membership in a national franchise association will typically

Material Change describing the material changes and, as with the FDD, a sworn certificate signed by the franchisor. The Statement of Material Change must be delivered as soon as prac-ticable after the change occurs.

Franchise statutes in each of the Regulated Provinces also contain certain complete exemptions from the requirement to deliver an FDD. The exemptions, although slightly different in each province, may be loosely grouped into the following categories: (i) the franchisee already has intimate knowledge of the franchise system; (ii) the financial risk to and initial invest-ment by the franchisee is relatively small; and (iii) the franchisee acquired the franchise from a third party without any active involvement of the franchisor. Despite the availability of these exemptions, the courts have historically interpreted them very narrowly, and as such, franchisors are advised to seek the advice of qualified franchise counsel before relying on an exemption, as the exposure for failing to provide an FDD can be significant. To mitigate this exposure, some franchisors voluntarily elect, as a matter of standard practice, to deliver an FDD both within and outside the Regulated Provinces, even when legally not required to do so. If a franchisor elects to voluntarily provide an FDD to a prospect, it is advisable to include an express state-ment and disclaimer explaining that the FDD is being provided voluntarily, for information purposes only and shall not be relied upon or deemed to create a disclosure obligation where one does not otherwise exist. Used properly, the FDD can also be a valuable sales and marketing tool for franchisors.


Yes, pre-sale disclosure obligations apply to sales to sub-franchisees. Pre-sale disclosure obligations reside with the person or entity granting the franchise. Each of the fran-chise statutes in the Regulated Provinces currently includes the term “sub-franchisor” in the definition of “franchisor”, and “sub-franchisee” in the definition of “franchisee”. As such, sub-franchisors will be subject to all of the same obligations imposed on franchisors if they are sub-franchising the right to open and operate a franchise; and similarly, sub-franchisees will be afforded all of the same rights available to franchisees.


Although certain differences exist, in each of the Regulated Provinces, the franchise statutes and the accompanying regu-lations expressly set forth what is to be included in an FDD, as well as the format and process to be followed in preparing and delivering an FDD.

The FDD must be updated regularly to ensure that it, at all times, includes all material facts prescribed by the applicable provincial statute, and all material facts related to the particular franchise being granted.

There are no continuing disclosure obligations owed to existing franchisees under current Canadian franchise legislation.


A franchisor who fails to comply with mandatory disclosure


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Canada’s Competition Act is a federal law governing most business conduct in Canada, including franchising. It contains both criminal and civil provisions aimed at preventing anti-competitive market practices. Its purpose is to maintain and encourage competition in Canada in order to: (i) promote the efficiency and adaptability of the Canadian economy; (ii) expand opportunities for Canadian partic-ipation in world markets while at the same time recognising the role of foreign competition in Canada; (iii) ensure that small- and medium-sized enterprises have an equitable opportunity to partic-ipate in the Canadian economy; and (iv) provide consumers with competitive prices and product choices. The Competition Bureau is responsible for the administration and enforcement of the Act, and will, upon request by the Commissioner, review a business to ensure it is not engaging in prohibited or anti-competitive prac-tices. The Competition Tribunal is the adjudicative body that hears reviewable practices cases. The most commonly reviewed prac-tices include price-maintenance, price-fixing, bid-rigging, running cartels and misleading advertising.


There is no maximum permitted term for a franchise agreement in Canada.


There is no maximum permitted term for a related product supply agreement in Canada.


The imposition of minimum prices would be subject to the price-maintenance provisions of the Competition Act, which are only engaged where the practice has an adverse effect on compe-tition in the relevant market, such that a market power has been created, enhanced or preserved. As such, a franchisor with less than 35% of the market share will not typically attract any scru-tiny from the Competition Bureau. There are no penalties for price maintenance, but the Tribunal can make an order prohib-iting the franchisor from engaging in the conduct.

There is no restriction on the imposition of maximum prices by franchisors.


There are no minimum obligations that a franchisor must observe when offering franchises in adjoining territories. However, pursuant to the regulations under the provincial fran-chise statutes in the Regulated Provinces, a franchisor must disclose in the FDD its policies, if any, regarding territorial exclusivity and the proximity between any two or more fran-chises or other entities using the same trademarks.


Under Canadian law, restrictive covenants and covenants not to

require adherence to that association’s policies and code of conduct. For example, members of the CFA are expected to comply with the CFA’s Code of Ethics, which includes obliga-tions such as complying with all statutory pre-sale disclosure obligations and not discriminating against a franchisee based on race, religion, gender, age, disability or other prohibited grounds.


Canada has two official languages, French and English. Franchise businesses intending to operate in Québec must also comply with French language laws and, in particular, the Charter of the French Language. Franchisors operating in Québec will be expected to carry on business in French and must have all of their materials (oper-ations manuals and other documentation for use by employees) translated into French, although the FDD and franchise agreement itself need not be translated provided it specifically stipulates that the parties have agreed that it be drawn up in English.



Foreign investors looking to invest in excess of $5,000,000 in Canada may be subject to the Investment Canada Act. The purpose of this Act is to provide for the review of significant investments by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada, and to protect against investments by non-Canadians that could be injurious to national security.


The most common form of business entity used by franchisors to operate their business is the corporation. However, limited partnerships or unlimited liability corporations are also used.


There are no franchise-specific registration requirements. However, both franchisors and franchisees operating a business in Canada will be subject to all of the same, standard requirements appli-cable to any business, including but not limited to, incorporation and business name registrations, construction permits, operating licences, banking and tax accounts, etc. The number and nature of the licences and registrations required will vary depending on the business and jurisdiction. As a starting point, the FDD will typi-cally identify most, if not all, of the primary licences, permits and registrations required to operate the franchise.

3 Competition Law




Franchise 2021

5 Liability


The primary remedy available to a franchisee who never received an FDD from a franchisor, or who receives a materially defi-cient FDD, is statutory rescission. Statutory rescission entitles the franchisee to rescind all franchise and ancillary agreements entered into with the franchisor without any further obligation or penalty and financially returns the franchisee to its pre-sale position. There are two limitation periods applicable to rescis-sion claims:1. a 60-day period for minor or non-material deficiencies in

the FDD or statement of material change, or for failure to provide the FDD or a statement of material change within the time required by the governing statute; or

2. a two-year period for failure to provide an FDD altogether or for material deficiencies so egregious as to constitute no disclosure.

Additionally, if a franchisee suffers a loss because of a misrep-resentation contained in an FDD or in a statement of a mate-rial change or as a result of the franchisor’s failure to comply in any way with the disclosure provisions of the applicable fran-chise statute, the franchisee has a right of action for damages against the franchisor. The general limitation period of two years applies in this instance.


The party granting the franchise is the one obligated to comply with the applicable franchise legislation. As such, in a master franchise relationship, liability for disclosure non-compliance or for pre-contractual misrepresentation would rest with the master franchisee.

Nevertheless, a franchisor would be well advised to obtain an indemnity from a master franchisee to ensure it is protected. Such an indemnity would be enforceable save and except for any provision seeking to improperly waive obligations found in the governing franchise statute.


No. The franchise statutes of all the Regulated Provinces expressly state that any purported waiver or release by a fran-chisee of a right granted under a franchise statute, or of an obli-gation imposed on a franchisor, is void. Parties are not permitted to contract out of the governing franchise legislation, thus any disclaimer language, waiver or release designed to avoid liability for pre-contractual misrepresentation would be void. That said, many franchisors nevertheless will have franchisees sign a sepa-rate acknowledgment or include acknowledgment clauses in

compete are considered restraints on trade and are unenforce-able, unless the franchisor can demonstrate that the restrictive covenant is reasonable in its scope in terms of (i) territory, (ii) duration, and (iii) subject matter, and is further necessary for the protection of the franchisor’s legitimate or proprietary interests. If the covenant survives the first level of inquiry and the fran-chisee still wishes to challenge its enforceability, the franchisee must establish that the restrictive covenant is contrary to the public interest or otherwise offends public policy.

The same legal assessment applies to in-term and post-term restrictive covenants.



Trademarks in Canada are protected at the federal level under the Trademarks Act. The primary purpose of the Act is to prevent unfair competition by protecting the use of trademarks that uniquely distinguish the goods or services of a business. Recent amendments to the Act will better align Canada with major international intellectual property treaties, including the Madrid Protocol, the Nice Agreement and the Singapore Agreement (“Treaties”). Canada’s accession to these Treaties will foster international competitiveness for intellectual property owners, and reduce the cost and complexity of entering foreign markets. Among the more significant amendments are the following: (i) expanded protections to include novel “signs” or “combinations of signs” such as, letters, colours, holograms, sounds, scents, tastes and textures; (ii) removal of the requirement for an appli-cant to have made “use” of a trademark in Canada or elsewhere before obtaining registration; (iii) implementation of the Nice Classification and shortening of the initial term and renewal term to 10 years; and (iv) fuller remedies for infringement, espe-cially in respect of the importation of goods into Canada.


Trade secrets are not protected by any legislation in Canada; however, Canada does have a variety of legislation aimed at protecting a business’s intellectual property; for example, the Copyright Act, the Trademarks Act, and the Patent Act. Any busi-ness-critical information should also be expressly referenced and protected in the franchise agreement, with express provi-sions around use and ownership to ensure a franchisor’s right of action for breach of contract, should this confidential informa-tion be improperly used or otherwise exploited.


The Federal Copyright Act provides protection to persons who wish to restrict the use of their original work. Copyright law in Canada protects all original creative works, and the rights of the person or entity who created it. Copyrights may be registered, although registration is not required, and franchisors may license the right to reproduce their protected works to franchisees.


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arbitral rules of the provincial arbitration statute or the rules of a private body, such as the International Centre for Dispute Resolution or the ADR Institute of Canada.

7 Real Estate


Commercial leases will typically have an initial term of 10 years, often with one or more consecutive options to extend or renew the initial term for a five to 10-year period. The length of term, however, is a business issue negotiated by the parties to meet their specific business objectives. Often, franchisors and fran-chisees will seek to have the term of the lease, and any exten-sions/renewals available thereunder, coincide with the term of the franchise agreement.


Yes, these concepts are understood and enforceable in Canada.


There are no restrictions on the amount or type of real estate a non-national may acquire or sublet; however, foreigners may face higher property or land transfer taxes in some jurisdictions and may be subject to different capital gains tax rules when they sell a property. Further, certain banks may restrict the number of properties they will finance to a non-national.


Rent-free periods, key money and similar terms are subject to negotiation between the parties; there is no hard and fast rule. Rent-free periods are more common in leases where the prop-erty requires some development before the tenant can occupy the premises, or other limitations exist with the property. Key money is less common, but is occasionally requested by land-lords for premium locations.

8 Online Trading


The treatment of online sales can be, and is often, provided for

the franchise agreement signed by the franchisee confirming delivery and receipt of a compliant FDD and all material infor-mation, which information may be particularised further if/as appropriate. A franchisor will not be liable for pre-contractual misrepresentation where it can prove that the franchisee acquired the franchise with knowledge of the alleged misrepresentation.


Franchise legislation in the Regulated Provinces affords franchi-sees a right to associate. Canadian courts have interpreted the right to associate to extend to the right of franchisees to join together in litigation, including class actions. As such, an argu-ment can be made that class action waiver clauses ought to be unenforceable as they negate a franchisee’s statutory right to asso-ciate; however, this remains an unresolved issue in Canadian law.

6 Governing Law


The franchise statutes in each of the Regulated Provinces provide that franchise documents will be governed by the laws of the jurisdiction in which the franchise operates and any attempt by the parties to contract out of the governing franchise legislation will be void. Outside of the Regulated Provinces, where there is no governing provincial franchise law statute, the parties are free to select the governing law of their choice.


Canadian courts may assume jurisdiction over a dispute or enforce orders granted by a foreign jurisdiction where there is a “real and substantial connection” between the subject matter of the litigation or the damages suffered and the jurisdiction issuing the judgment. Determining whether there is a “real and substantial connection” is a multi-level analysis that considers several factors, such as: (i) whether the defendant lives in Canada; (ii) where the parties carry on business; (iii) where the cause of action arose; and (iv) where the contract connected with the dispute was executed.


Yes, alternative dispute resolution practices, including arbitra-tion, are recognised as viable means of dispute resolution in fran-chising and Canada is a signatory to the New York Arbitration Convention on the Recognition of Foreign Arbitral Awards. Arbitrations conducted in Canada will typically use either the



Franchise 2021


Yes, there is some risk that a franchisor may be held vicariously liable for the acts or omissions of a franchisee’s employees in the performance of the franchisee’s business if the franchisor is found to have exercised undue or significant control over the matter at issue.

A franchisor may mitigate its exposure to such claims by: (i) refraining from exercising undue, direct or excessive involve-ment in the franchisee’s operation of the business; (ii) ensuring that the franchised business includes a sign on the premises and the franchise agreement includes a provision unequivocally stating that the franchisee is an independent business; and (iii) ensuring that the franchise agreement includes an indemnity provision requiring the franchisee to indemnify the franchisor against any such claims.



There are no such restrictions on the payment of royalties to an overseas franchisor.


Yes, there is a mandatory withholding tax applicable to the payment of royalties under a trademark licence and a transfer of technology. However, if a tax treaty exists between Canada and the jurisdiction of the foreign franchisor, the withholding tax may be significantly reduced.

Structuring payments due from the franchisee to the fran-chisor as a “management fee” will not avoid application of the appropriate withholding tax.


No, there is no requirement that financial transactions between franchisees and franchisors be conducted in Canadian currency.



In Canada, unlike in Europe and other jurisdictions, the law of agency exists only at common law; there is no commercial agency legislation that would apply to a franchise relationship.

in the franchise agreement. Franchisors may direct or re-direct online sales according to territorial rights afforded a partic-ular franchisee and/or any discretion they may have reserved to themselves in the franchise agreement to retain or manage alter-native distribution channels, including online sales.


There are no limitations on a franchisor requiring a former franchisee to assign local domain names to the franchisor post-termination; such assignments are often mandated by the post-termination provisions of the franchise agreement.

9 Termination


Other than the basic contract law principles and the common law and statutory duty of good faith and fair dealing, which requires parties to exercise rights afforded to them honestly and in a commercially reasonable manner, there are no local laws that would override contractual terms, including termination rights, agreed to by the parties.


As a general rule, where a business relationship is being termi-nated prematurely, Canadian law requires the party seeking to terminate the relationship to provide the other party with “reasonable notice” of the impending termination. What consti-tutes “reasonable notice” in each instance will be fact-specific.

In fixed-term agreements, without early-termination provi-sions, premature termination may expose the terminating party to liability for the balance of the term remaining under the agreement; however, that liability will be subject to the termi-nated party’s duty to mitigate any losses flowing from the early termination.



Canadian law does not automatically deem franchisors to be joint employers of their franchisees’ employees. However, to mitigate any potential exposure, franchisors must be mindful not to reserve to themselves unnecessary discretion or rights, or to exercise too much control over employment and opera-tional matters appropriately residing with the franchisee, such as employee hiring or firing, and disciplinary decisions.


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A franchisee’s rights, if any, to renew or extend a franchise agreement are contained exclusively in the franchise agreement – there is no overriding statutory or common law right entitling a franchisee or obligating a franchisor to renew or extend an expired franchise agreement.


A franchisee may be entitled to damages if the franchise agree-ment contains a right to renew or extend, and the franchisor unjustly refuses to renew or extend the franchise agreement in breach of its duty of good faith and fair dealing. Whether the franchisor has breached its duty of good faith and fair dealing will require factual analysis. Often franchise agree-ments will include a liquidated damages provision which proac-tively prescribes a formula for calculating a party’s damages in the event of early termination or non-renewal of the franchise agreement. This is an effective way to manage potential liability where the relationship is severed early.

If the franchise agreement does not include a contractual right entitling the franchisee to renew or extend, the franchisee will not be entitled to any compensation or damages if the franchise agreement is not renewed or extended by the franchisor at the expiry of its term.



Yes, franchisors are entitled to impose restrictions on a fran-chisee’s right to sell, transfer, assign or otherwise dispose of its interest in the franchised business. These restrictions, which typically require obtaining the franchisor’s consent to the proposed transaction, will be set out in both the FDD and the franchise agreement.


Canadian law will recognise step-in rights provided in a fran-chise agreement. There are no registration requirements to enforce “step-in rights” or any right afforded by a franchise agreement; however, a franchisor must exercise any rights and discretion afforded to it under a franchise agreement in accor-dance with its common law and statutory duty of good faith and fair dealing.

A franchisee may be found to be acting as an agent for the fran-chisor where the franchisee or the franchisor represent to the public through their actions that the franchisee is an authorised representative or agent of the franchisor.

The parties may mitigate their exposure against such a finding by ensuring that both their conduct and their contract clearly convey that they are not agents of one another, but rather as franchisor and franchisee and that each operates as an indepen-dent contractor.



Yes, Canadian law imposes on both the franchisor and fran-chisee a reciprocal common law and statutory duty of good faith and fair dealing in the performance and enforcement of the franchise agreement.

The duty of good faith requires the franchisor to duly consider the legitimate interests of the franchise network as a whole and holds both parties to a standard of commercial reasonableness in the exercise of their rights under the franchise agreement. However, the duty of good faith is not a standalone duty; it does not amend or replace express contract terms of the franchise agreement, nor does it require the franchisor to prefer the inter-ests of the franchisees to its own; there are no fiduciary duties. A franchisor need only demonstrate that it honestly and reason-ably considered the interests of the franchisees. Whether a party has breached the duty of good faith and fair dealing will require a case-by-case, factual and contextual assessment.



Subject to the ongoing common law and statutory duty of good faith and fair dealing in the performance and enforcement of the franchise agreement, once pre-sale disclosure obligations are satisfied, the franchise relationship is governed by general contract law.



Franchise legislation enacted in the Regulated Provinces provides for an exemption from disclosure obligations in the event of a renewal or extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee and no material change since the previous franchise agreement was executed. Notwithstanding the availability of this exemption, however, as a best practice and to mitigate potential exposure, it is recommended that fresh disclosure be provided prior to renewal or extension of a fran-chise agreement.



Franchise 2021

of attorney, certain real estate documents and several others, remain exempt and still require a wet ink signature. The global Coronavirus pandemic has relaxed or temporarily suspended some of these exemptions to facilitate business operations in the face of mass business closures and strict restrictions on public gatherings. Legal advice should be sought before relying on e-signatures to execute any collateral agreements that may be appended to or form part of a franchise agreement.


Although an electronic copy of a properly preserved, original, complete and duly executed franchise agreement will be valid and enforceable under Canadian law, if available, it is advisable, as a best practice, to also preserve all original wet ink copies of any legal documents signed by the parties, including the fran-chise agreement.



Without a doubt the most damaging and persistent threat to fran-chising from the Coronavirus pandemic was the sharp decline and continued uncertainty of the economy caused by the sudden and mandatory closure of all non-essential services and busi-nesses. However, necessity is the mother of invention and many franchisors have used this period to re-imagine their businesses to better navigate the uncertain future, the possibility of subse-quent waves of the virus and skittish consumer confidence.

The pandemic has accelerated the pace of innovation in franchising, challenged traditional norms around exclusivity, marketing and branding and fostered creative partnerships across sectors and deeper grass root, community outreach initi-atives. Examples include restaurants partnering with delivery platforms and supermarkets to deliver pre-prepared meals and groceries, gyms offering online exercise programmes, auto deal-erships facilitating remote sales and service appointments and endless other examples. Technology has taken a front seat, labour models are being streamlined, real estate re-configured, health and safety protocols optimised to win back consumer confidence, supply chains revisited to focus on locally sourced, sustainable goods, menus, goods and services simplified to manage costs and highlight health, wellness and convenience.

While many of these trends existed or were in development pre-pandemic, they have taken on a new urgency and impor-tance now. Surviving in a post-pandemic world will require ingenuity, courage and an ability to quickly adapt to changing dynamics. Business as usual is no longer an option, but with change comes opportunity.


Yes, such a power of attorney will be recognised and treated as valid by Canadian courts. There are no registration require-ments; however, a franchisor seeking to rely on a power of attorney to unilaterally enforce terms of the franchise agree-ment should ensure that it is properly drafted to address all form requirements, including: the scope and purpose of the power of attorney; when it takes effect; if it is revocable; to whom it is granted; and the proper name of the parties, and ensure it is dated and executed in the presence of two witnesses.



The use of electronic signatures is becoming increasingly important in facilitating business transactions in today’s digital world. As such, every Canadian jurisdiction (both at the federal and provincial levels) has enacted legislation and regulations addressing the use of electronic signatures in Canada.

At the federal level, digital contracting is governed by the Personal Information Protection and Electronic Documents Act (“PIPEDA”), which recognises functional uniformity between paper and electronic documents and outlines the following requirements for a secure electronic signature:■ the e-signature is unique and distinctive to the person

using it;■ itiscreatedunderthesigner’ssolecontrol;■ thetechnologyusedtocreateitcanconfirmtheidentityof

the signer; and■ it is protected by technology that can detect any subse-

quent changes to the e-signature.At the provincial level, most of the provinces have enacted

legislation based on the Uniform Electronic Commerce Act (“UECA”). However, Québec has opted to enact independent digital contracting legislation stated in the Act to Establish a Legal Framework for Information Technolog y.

Fundamentally, the requirements for e-signatures under the UECA and PIPEDA are very similar. Both PIPEDA and the UECA state that a contract should not be deemed invalid solely because it is in electronic form.

However, franchisors and franchisees should note that certain documents, such as wills, promissory notes, certain powers


52

Helen Fotinos leads Dentons’ National Franchise and Distribution Group in Canada and is a Partner in the firm’s Corporate Group. Her prac-tice focuses on all aspects of franchise/distribution law and related corporate/commercial contracts and disputes.Prior to returning to private practice, Helen served as General Counsel to domestic and international franchisors, manufacturers and distrib-utors in the quick-service/casual dining, food and beverage, hospitality and automotive industries. She has extensive experience developing integrated risk-management strategies and practical business solutions that assist clients in managing both their day-to-day operations as well as the strategic long-term growth of their businesses.Helen regularly advises clients on a wide variety of issues, including: Canadian market entry, exit and expansion strategies; franchise disclo-sure obligations; unit, area development and master franchise agreements; system changes; enforcement of franchise obligations; termi-nations; renewals and transfers; supplier, distribution and employment agreements; brand marketing; and risk and litigation management.Helen is recognised as a leading practitioner and thought leader in both franchising and legal service innovation.

Dentons Canada LLP77 King Street West, Suite 400Toronto-Dominion CentreToronto, ON M5K 0A1Canada

Tel: +1 416 863 4547Email: [email protected]: www.dentons.com/en/global-presence/canada

Franchise 2021

Canada

John Papagiannis practises corporate and commercial law from Dentons Canada LLP’s Montréal office. His practice focuses on mergers and acquisitions and franchising and distribution matters. John serves as the Regional Lead of the Franchising & Distribution Group in Québec and also leads the Montréal office’s M&A Group.John represents clients on a broad range of transactions in both Québec and Ontario, including share and asset purchases, dispositions, amalgamations, corporate reorganisations and joint ventures. John regularly advises emerging growth companies and entrepreneurs on a broad spectrum of legal matters, from complex commercial agreements to capital raising at various stages and exit strategies. John also advises clients on various franchising matters in Québec and Ontario including on franchise agreements, master franchise agree-ments, development agreements, ancillary franchise-related agreements as well as disclosure documents and disclosure-related obligations. John acts as corporate secretary to The Jacques-Cartier and Champlain Bridges Inc., a federal Crown corporation.

Dentons Canada LLP1, Place Ville Mariebureau 3900 Montréal Québec, H3B 4M7Canada

Tel: +1 514 878 5898 Email: [email protected]: www.dentons.com/en/global-presence/canada

Dentons is the world’s largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global Elite Brand Index, a BTI Client Service 30 Award winner and recognised by prominent business and legal publications for its innovations in client service, including founding Nextlaw Labs and the Nextlaw Referral Network. Dentons’ polycentric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work.Our team advises clients through all stages of a franchise life cycle – from company creation and corporate governance, to obtaining and protecting intellectual property, to strategic expansion and exits, and effective dispute resolution. We are the only firm with a fully integrated global franchise

practice to offer seamless round-the-world, round-the-clock services every-where our clients do, and want to do, business.

www.dentons.com/en/global-presence/canada

Stacy Shields is a Senior Associate in the Vancouver office of Dentons Canada LLP and the Regional Lead of the Franchise & Distribution Group in British Columbia. Stacy advises clients on a broad range of corporate and commercial matters, including corporate organisation and governance, mergers and acquisitions and franchise law.

Dentons Canada LLP20th Floor, 250 Howe StreetVancouver, BC V6C 3R8 Canada

Tel: +1 604 648 6546Email: [email protected]: www.dentons.com/en/global-presence/canada


Franchise 2021

Chapter 8 53

China

Jones & Co. Xin (Leo) Xu

Paul Jones

China


The Registration Measures require a franchisor to register with MOFCOM within 15 days of the date the first franchise contract is signed. The list of documents to be submitted is set out in Article 6 of the Registration Measures. International franchi-sors should register with MOFCOM in Beijing, rather than with local MOFCOM departments. The franchisor should register any changes with MOFCOM within 30 days.

Registration with MOFCOM is a relatively straightforward process; however, international franchisors may experience difficulties in demonstrating their compliance with the 2+1 Rule (see question 1.9).

Trademark licences must be recorded with the China National Intellectual Property Administration (CNIPA).

There is no requirement to register the franchise disclosure document with any governmental authority.


Yes. Articles 21 to 23 of the Franchise Regulation require the franchisor to disclose certain information to the franchisee in writing at least 30 days before signing the franchise agreement. The list of information required to be disclosed is set out in Article 5 of the Information Disclosure Measures. Article 23 of the Franchise Regulation provides that a franchisor shall not conceal any relevant information, even if it is not specifically listed, which can be interpreted as a requirement to disclose all material facts.

General contract law provisions also apply to disclosure. Article 42 of the Contract Law requires parties to act in “good faith” during negotiations and prohibits them from intention-ally concealing material facts related to the making of a contract. This provision is based on the civil law doctrine of culpa in contra-hendo (“fault in negotiating”) and was interpreted in other civil law jurisdictions to require disclosure of all material facts.


Pre-sale disclosure is mandatory in a sale to a sub-fran-chisee. The sub-franchisor has the same obligations towards a sub-franchisee as the franchisor has towards a franchisee.



The definition of “franchising”, 特许经营 (texujing ying), is provided in the Commercial Franchise Administration Regulation (商业特许经营管理条例, Shang ye Texujing ying Guanli Tiaoli), Ordinance No.485ofJanuary31,2007(Franchise Regulation). A franchise must have three elements: (i) a franchisor, through an agreement, grants other operators (franchisees) the right to use the franchisor’s business-operating resources, including registered trademarks, logos, patents, and proprietary technologies; (ii) the franchisee conducts business under a uniform mode of operation; and (iii) the franchisee pays franchise fees according to the agreement.

The Chinese definition of franchising is very broad and may also include distribution systems if all three elements of the defi-nition are met.


All franchise agreements must conform to the general contrac-tual principles, found in Articles 1 to 129 of the PRC Contract Law (合同法, Hetong Fa).

Franchise arrangements must also comply with the franchise-specific regulations, including:■ theFranchiseRegulation;■ CommercialFranchiseRegistrationAdministrativeMeasures

(商业特许经营备案管理办法, Shang ye Texujing ying Bei’an Guanli Banfa), Ministry of Commerce (MOFCOM) Decree No. 5 of 2011 (Registration Measures);

■ Commercial Franchise Information DisclosureAdministrative Measures (商业特许经营信息披露管理办法, Shang ye Texujing ying Xinxi Pilu Guanli Banfa), Decree No. 2 of 2012 (Information Disclosure Measures); and

■ the Administrative Measures for Foreign Investment inCommercial Fields (2004) (外商投资商业领域管理办法, Waishang Touzi Shang ye Ling yu Guanli Banfa), MOFCOM Decree No. 8 of 2004 (Foreign Investment Measures).


Yes, they will be treated as such.


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The Chinese business association for the franchise industry, the China Chain Store & Franchise Association (http://www.ccfa.org.cn), requires its members to abide by its Code of Ethics.


There is no requirement to provide disclosure to a prospect in Chinese. In practice, providing a Chinese language version is highly recommended to avoid a franchisee’s claims that the English version was not understood.

All documents submitted to MOFCOM for registration must be translated into Chinese. A translation will also be required for courts if there is a dispute, or by the authorities for an admin-istrative hearing.



Foreign investment in China is restricted or prohibited in some industry sectors. See Special Administrative Measures for Access of Foreign Investments (Negative List) (外商投资准入特别管理措施（负面清单）), updated by the National DevelopmentandReformCommissionandMOFCOMinJune2019. Generally, the types of activities found in franchising are not restricted. The new Foreign Investment Law (外商投资法), whichcameintoforceonJanuary1,2020,hasfurtheropenedupthe Chinese market to foreign investment.


Most international franchisors prefer to grant franchises in China without establishing a local entity. Franchisors who decide to incorporate in China used to establish a wholly foreign-owned enterprise (WFOE), but this type of entity is now abol-ished. Now, legal entities incorporated in the PRC by foreigners are governed by the same law (the Company Law of the PRC) as the domestic entities.

Chinese partners often suggest forming a joint venture. The special laws on joint ventures have also been abolished and equity joint ventures are now governed by the Company Law. However, contractual arrangements still offer more flexibility and easier winding up than equity joint ventures.


Every business entity in China must obtain a business licence, the scope of which must include offering franchises and the activities covered by the franchise model. Within 30 days after obtaining the business licence, the company should also obtain a tax registration certificate with the State Tax Administration.


The disclosure shall be in writing. There is no prescribed format, but Article 5 of the Information Disclosure Measures can serve as an example of the order in which information can be presented.

There is no obligation to make continuing disclosure, but disclosure must be updated before signing the franchise agree-ment if there was a significant change in the information provided by the franchisor.


If a franchisor conceals relevant information or provides false information, the franchisee may terminate the franchise agree-ment. There is no time limit to effect the rescission under the Franchise Regulation. However, some Chinese courts have recently denied rescission claims in circumstances where there was no substantial negative impact on the franchisee caused by failure to disclose.

The franchisee can claim damages under the Contract Law, which are generally low in franchise cases.

The Franchise Regulation also provides for an administra-tive penalty of up to RMB 100,000 (approx. USD 15,000), but MOFCOM rarely acts on it.


Yes. In addition to the disclosure and registration obligations, the franchisor shall:■ have a mature business model and be able to provide

continuous operational guidance, technical support, training and other services to franchisees;

■ haveat leastone trademark,patent,designpatent, copy-right or other business resource registered in the PRC (although in some cases it seems that this requirement has been slightly relaxed); and

■ haveownedandoperatedat least twooutletsforat leastone year (the “2+1 Rule”). Corporate-owned outlets may be operated directly or through subsidiaries or, in some cases, other affiliates. Corporate-owned outlets located outside of the PRC will satisfy the 2+1 Rule if they are operated under the same franchise brand. If the outlets are located outside of the PRC, franchisors may use statements issued by trade organisations (such as the International Franchise Association) to establish compliance with the 2+1 Rule.

According to the interpretation issued by the Beijing High People’s Court, failure to comply with the 2+1 Rule is an admin-istrative offence and does not invalidate the franchise agreement as long as the lack of qualifications has been disclosed to the franchisee.


No, membership with a franchise association in China is not mandatory.


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Both in-term and post-term non-compete and non-solicitation covenants are enforceable in Chinese courts. However, over-broad restrictive clauses may not be enforced based on the doctrine of good faith set out in the Contract Law and the General Principles of Civil Law.

Under the Labour Contract Law (劳动合同法, Lao Dong He Tong Fa), a post-term non-compete covenant is generally not enforceable against an individual employee unless compensation is paid for the term of the non-compete period, which is restricted to two years.



The PRC is a party to all major international conventions related to trademark protection. The PRC is a “first to file” jurisdic-tion. Trademarks registered outside of the PRC are generally not protected in China without a local registration.

Registration of a trademark with the CNIPA takes between 12 and 15 months, if there are no oppositions or complications. The registration is valid for 10 years, with an option to renew.

Despite the significant improvement of intellectual prop-erty enforcement in the PRC, it is recommended to apply for the registration of trademarks in the PRC as early as possible, as Chinese trademark squatters are still quite active. More impor-tantly, franchisors should consider registering their trademarks in Chinese characters to avoid giving a franchisee the opportu-nity to register it and “break away” from the franchise.

Distributors, franchisees and agents should never register trademarks without permission from the trademark holder. Recourse for this infringement can be made to the courts under Article 15 of the Trademark Law (商标法, Shangbiao Fa).


Trade secrets are protected under the Anti-Unfair Competition Law, Criminal Law and can also be protected by a contract between the parties.

While trade secret infringement lawsuits are difficult to win, often due to the poor collection of evidence by the parties, the volume of trade secrets litigation in China has increased. The 2019 amendments to the Anti-Unfair Competition Law expanded the definition of a trade secret, the scope of persons that can be liable for an infringement, and shifted the burden of proof in favour of claimants.

Practically speaking, a franchisor should ensure that a non-disclosure agreement is properly executed and keep track of what information is disclosed and when the disclosure occurred. Narrower non-disclosure agreements, with a clear scope of the information covered, should be considered.


Yes. The PRC is a party to all major copyright treaties. The PRC

Doing business in certain sectors may require additional permits, such as catering service licences, fire protection approvals, etc.

3 Competition Law


The PRC’s competition laws include the Anti-Unfair Competition Law (反不正当竞争法, Fan Bu Zhengdang Jingzheng Fa) and the Anti-Monopoly Law (中华人民共和国反垄断法, Zhonghua Renmin Gongheguo Fan Longduan Fa).

The Anti-Unfair Competition Law provides statutory protec-tion to trade secrets in addition to contractual obligations of the parties. The statute also prohibits unfair business practices, such as the fraudulent or misleading use of trademarks, fraudu-lent advertisement and the unauthorised use of domain names.

The Anti-Monopoly Law prohibits monopoly agreements in vertical relationships which: (i) fix prices for resale; and (ii) restrict the lowest price for resale. There are also restrictions on horizontal agreements among competitors, abuses of dominant positions, and administrative monopolies.


There is no statutory maximum term.


No, there is not. However, the existence of a material product supply agreement and its terms and conditions must be disclosed to a potential franchisee.


The PRC’s Anti-Monopoly Law prohibits vertical agreements that fix resale prices or set minimum resale prices. In the last few years, retail price maintenance has become a significant issue for Chinese anti-monopoly authorities (especially in sectors such as pharmaceuticals and auto dealers). Franchise agreements which set “recommended prices” will likely attract scrutiny if there is evidence that the franchisor enforces the recommendation.

In the past, enforcement authorities and the courts have not seen eye to eye on the issue of whether a negative effect on competition is required to secure conviction for a resale price maintenance offence. The price bureaus maintain that they do not need to prove intent or a negative effect on competition to secure a conviction for this offence. While the courts used to require proof of a negative effect on competition to uphold a conviction for a resale price maintenance offence, judicial atti-tudes seem to shift in favour of the government.


There are no such obligations.


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An authorised public body in the PRC or the People’s Procuratorate can also bring a public interest claim before a court, particularly in areas such as environmental protection and consumers’ rights.

Representative actions are not common in China, including in a franchising context.

Waivers of a right to sue (including a collective action) are not enforceable under PRC law.

6 Governing Law


If the transaction is foreign-related, parties are generally free to select foreign law to govern their contract and other fran-chise documents. However, there are a number of advantages for selecting PRC law as the governing law.

If the parties choose Chinese courts as a dispute resolu-tion forum (which is generally recommended, as the enforce-ment of foreign judgments and arbitral awards is difficult in China), explaining foreign law to the judge will be expensive and cumbersome. If the judge is unclear as to the effect of the foreign law, the judge will likely apply Chinese law.

Chinese judges have a good track record of enforcing commercial contracts governed by PRC law: China is ranked 5th in The World Bank Group’s Enforcing Contracts ranking (https://www.doingbusiness.org/en/rankings), while Hong Kong, a popular jurisdiction of choice in international transac-tions related to China, is ranked 31st.

A choice of foreign law by the parties may be trumped by the public policy interests. The Law on the Application of Laws to Foreign-related Civil Relationships (中华人民共和国涉外民事关系法律适用法) provides that if the application of the laws of a foreign country would harm the public interest of the PRC, Chinese laws will govern. The prevention of fraud is generally considered to be in the public interest, and PRC courts consider an intentional violation of the disclosure requirement to be fraud.

The enforcement of foreign judgments and orders is difficult in China. There are very few treaties between the PRC and western countries allowing the mutual recognition and enforcement of judgments. In the absence of treaties, many western countries are not prepared to enforce the judgments of Chinese courts, and accordingly, judgments from such jurisdictions will not be enforced in China. Where there is reciprocity, the judgment of the foreign court will still be examined by local courts as to whether it contra-dicts the basic principles of the PRC law, or violates state sover-eignty, security, or the social and public interest of the country.

International franchisors should strongly consider choosing PRC laws and Chinese courts when the enforcement against assets of a franchisee located in China is anticipated.


Successful preservation measures requests (a Chinese equiva-lent of injunctions) are still rare in the PRC. There is also no legal basis for PRC courts to grant interlocutory preservation measures based on a foreign judgment before the foreign judg-ment is recognised.

Copyright Law (著作权法, Zhuzuoquan Fa) protects copyright in written works and computer software. PRC courts recognise and protect copyright without registration. However, registration of a copyrighted object with the Copyright Protection Centre of China is useful where online enforcement is anticipated.

If a translation of an operations manual is made, it is advisable to obtain a written assignment of copyright from the translator, even if the translator is the franchisor’s employee.

5 Liability


The franchisee is entitled to terminate the agreement if the fran-chisor conceals relevant information or provides false infor-mation (see question 1.8). Damages can be claimed under the Contract Law; however, damages awards are generally low in franchise cases.


Generally, the master franchisee is responsible for providing complete and accurate disclosure to sub-franchisees. As there are no statutory rules governing relationships between franchisors and sub-franchisees, there is no guidance from MOFCOM or the courts regarding liability of the franchisor for non-disclosure or misrepresentation by the master franchisee.

General principles set out in the Contract Law, including “good faith” requirements (see questions 1.5 and 13.1), apply to contractual indemnity for disclosure non-compliance or pre-contractual misrepresentation. Under PRC laws, limita-tion of liability for bodily injuries or death, or exclusion of liability on the grounds of negligence or gross negligence, are unenforceable.


No, they cannot.


Civil Procedure Law of the PRC (民事诉讼法, Minshi Susong Fa) regulates three different categories of collective actions, which can be considered an alternative to the concept of class actions: a) a claim by a party or against a party which consists of two

or more persons;b) a claim by numerous plaintiffs, whose number and identity

are known when the action is initiated; andc) a claim on behalf of an undetermined number of unidenti-

fied plaintiffs at the point at which the case is filed.


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competitive. Rental rates in those locations are on a par with other regional commercial hubs such as Toronto, although other costs of doing business are lower. It is quite difficult to find a good location for a franchise store in a major city in China. Franchisors should engage their local real estate agent for an assessment of locations and costs. The terms of the lease agree-ment, including rent free periods or key money, will depend on the location of the property and negotiations with the land-lord. Market conditions in the so-called “second tier cities” (for example, Wuhan, Foshan) may be more favourable for tenants.

8 Online Trading


At this time, there is no statutory prohibition for a franchisor to impose such requirement.


A franchise agreement may require a franchisee to assign local domain names to the franchisor when the franchise is termi-nated. Although the registration of a domain name in China to a non-resident is not prohibited, in practice, foreign entities and individuals may encounter procedural difficulties when regis-tering or assuming a “.cn” domain name.

9 Termination


No, there are not. However, because there are no statutory termination provisions, it is advisable for the parties to include a detailed termination clause in the agreement. Otherwise, the provisions of the Contract Law will apply.


Subject to the good faith requirements (see question 13.1), there are no such rules.



This risk is very remote in the PRC.

At this time, PRC courts are unlikely to enforce the orders of foreign courts, although this may change in the future.


China is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). Arbitration is available for both domestic and foreign-related disputes. Parties to a cross-border commercial agreement may choose between Chinese arbitral institutions (for example, Shanghai International Economic and Trade Arbitration Commission) and international bodies. Ad hoc arbitration is generally not recognised.

The downsides of choosing arbitration for a PRC-related dispute are the added cost and time delay of enforcing the award. Any arbitral award must be approved by a local court for enforcement, and such hearings take almost as much time and money as a trial. In addition, all refusals to enforce an arbitral award must be approved by the higher court, which adds signif-icant delay to the proceedings.

7 Real Estate


Domestic leases of commercial property are usually between three and five years.


Yes, a conditional lease assignment is enforceable. However, under PRC law, a foreign legal entity cannot be a tenant for the purpose of operating a business without registering with the PRC government first.


Yes, foreign entities are prohibited from purchasing or leasing real estate other than for self-use. To be able to purchase, lease or sub-lease real estate for the purpose of operating a business, a foreign entity should incorporate a Chinese company and obtain approvals from the local MOFCOM.


The commercial real estate market in major cities is very


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Some franchisors have incorporated in Hong Kong to take advantage of a lower withholding tax rate for money transfers from China to Hong Kong. However, this option is only avail-able to Hong Kong entities carrying out actual business activity in Hong Kong and complying with the 2+1 Rule.

If a foreign franchisor incorporates in China, its profit will be subject to an enterprise income tax at the rate of 25%.

Taxes paid by a foreign franchisor in China may be credited against the income tax of the franchisor in its home country, depending on the tax laws of the home jurisdiction.


Aside from the foreign exchange restrictions, there are no such requirements.



Under PRC law, there is little risk of confusion between fran-chising and commercial agency. Commercial agency (known as “entrustment contracts” in China) is a nominal contract, i.e., it is regulated by a separate chapter in the Contracts Law and is distinct from franchise arrangements (see the definition of “franchise” in question 1.1 above). Further, China has not adopted a European law principle that entitles a commercial agent for a payment for goodwill upon termination.



Yes, the concept of fair dealing runs throughout legislation in the PRC. Article 6 of the General Principles of Civil Law (中华人民共和国民法总则), Article 6 of the Contract Law, and Article 4 of the Franchise Regulation require the parties to act fairly, honestly and in good faith.



There is a general principle in the Contract Law requiring the parties to perform their contractual obligations in good faith. The Franchise Regulation requires the franchisor to provide ongoing operational guidance, technical support and busi-ness training in accordance with the franchise agreement, and to disclose to the franchisee any promotional and marketing expenses. The franchisee is required to obtain the franchisor’s consent before transferring a franchise to a third party.

There are, however, no mandatory requirements similar to the U.S. franchise rules allowing termination of the franchise solely on the grounds specified in the regulations.


Like many emerging economies, China has a significant problem with consumer fraud. Franchisors should take steps to avoid consumer fraud and monitor quality control issues.

Article 15 of the Franchise Regulation requires that the quality and standards of the products and services supplied by the franchise system comply with the law and regulations. Article 11(7) requires that the franchise agreement contains provisions for “the protection of consumer rights and interests by the franchisee and franchisor and allocation of responsibili-ties and liabilities for compensation”.

Parties should also agree on the standards for the quality of products or services, and how these will be monitored and main-tained. Contractual provisions that unfairly restrict the liability of the franchisor for quality deficiencies of its products or services may be overridden by the Consumer Protection Law or other public interest legislation, such as food safety laws and regulations.



The Chinese currency, “renminbi” (also known as “yuan”), is still not freely exchangeable, although controls have loosened over the last decade. The controls are administered by the State Administration of Foreign Exchange (SAFE) and are imple-mented by the banks.

In order to be allowed to purchase foreign currency above the quota (up to USD 50,000 per resident), the payor must submit documents evidencing the requirement to make the payment outside the country (for example, a franchise agreement) to a bank. Franchisors should note that franchise agreements must be registered with MOFCOM, and trademark licence agree-ments must be registered with the CNIPA, otherwise a bank may refuse to make the payment.

There are also tax regulations applicable to overseas remit-tances by local payors. The bank will not wire the money until the tax authority issues a tax recordal form. Many tax authori-ties require Chinese payors to pay all withholding taxes before the tax recordal form is issued.


Royalties to a foreign licensor are subject to VAT at a rate of 6% and withholding tax at a rate of 10%, unless a tax treaty between China and the licensor’s home jurisdiction sets out a different rate. Management fees and other active income generated from China is subject to various taxes and is not an effective option to avoid taxation. Moreover, the tax authorities may be aggressive in applying withholding tax to service fees and other payments that should not be subject to withholding tax, in an effort to prevent withholding tax avoidance.


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They are not prohibited, but there are certain practical issues that must be considered in advance of signing the franchise agreement.

To complete the migration of the franchise to the franchisor, some government approvals will likely be required. The offi-cials at the relevant governmental bodies may be unwilling to grant the approvals to a holder of an authorisation, as this is not a widespread practice.



Electronic signatures which comply with the reliability require-ments of the PRC’s Electronic Signature Law (中华人民共和国电子签名法, Zhonghua Renmin Gongheguo Dianzi Qianming Fa) are recognised as a valid way of signing a franchise agreement. In practice, however, “wet ink” is still the preferred method of signing franchise agreements.


The rules of evidence in the PRC are stricter than in many common law jurisdictions, and uncertified copies of paper documents are generally not admissible as evidence. It is recommended to keep the original paper versions of franchise agreements, in case they are required to be presented to a court or an administrative body.



China was the first to impose strict quarantine measures to curb the spread of the Coronavirus pandemic, and it was also the first country to see positive results from its efforts.

As of the time of writing, the Chinese economy seems to be actively recovering. While consumers in the rest of the world are still reducing spending on discretionary categories, Chinese consumers are actively going back to “normal” activities such as eating out, going to the gym, and travelling (albeit domes-tically, as international travel is still shut down). It should be noted, however, that food take-out, e-commerce, and online learning, which saw a significant boost worldwide as a result of the pandemic, have been on the rise in China well before the arrival of Coronavirus and will likely continue to grow.

AcknowledgmentThe authors would like to thank Katya Logunov for her assis-tanceinpreparingthischapter.KatyaisanassociateatJones& Co., educated in both common law and civil law. She specia-lises in franchising and general commercial law. Katya can be reached at +1 647 748 1749, or [email protected].



If the franchise agreement is renewed on the same terms and condi-tions, a new disclosure is not necessary. Otherwise, Information Disclosure Measures require the franchisor to provide disclosure at least 30 days before signing the franchise agreement.


There is no such statutory right.


No, the franchisee is not entitled to any compensation.



Yes, subject to the good faith requirements (see question 13.1), a franchisor can restrict the franchisee’s freedom to dispose of the franchised business. The Franchise Regulation also prohibits the franchisee from assigning the business to a third party without the franchisor’s consent.


“Step-in” rights are recognised by PRC laws. However, “step-in” rights are not a practical option for most foreign franchisors because their implementation requires the establishment of a Chinese legal entity with a proper scope of business in its business licence. For a foreign franchisor without presence in China, it is more efficient to use other remedies, such as termination rights.


Such powers of attorney are known as “authorisations” in China.


60

Paul Jones’ practice is broadly focused on the national and international distribution of goods and services. Paul helps clients develop franchise systems and licensing and distribution programmes, including the preparation of disclosure documents and agreements, and negotiates disputes. He assists many foreign and Canadian businesses expanding internationally. He has been consulted by the Government of the People’s Republic of China on the preparation of franchise legislation, and his papers on Chinese fran-chise laws are widely used as references by practitioners and academics around the globe. He regularly advises on national and multijurisdictional trademark and domain name applications and disputes, including counterfeiting matters, and on copyright protection issues. Paul has developed significant expertise in marketing and pricing practices and advises clients on the interaction between intellectual property and competition law.Paul is familiar with both common law and civil law systems. He has studied Mandarin Chinese and follows legal developments in the PRC.

Jones & Co.67 Yonge Street, Suite 602Toronto, OntarioM5E 1J8Canada

Tel: +1 416 703 5716Email: [email protected]: www.jonesco-law.ca

Franchise 2021

China

Xin (Leo) Xu is an associate at Jones & Co. Leo is also a registered trademark agent in Canada. Leo’s practice is focused on IP (trademark, copyright and industrial design) applications and prosecutions in Canada and international distribution and franchising. Leo has rich experi-ence in assisting foreign clients doing business in China. Leo has both a civil and common law legal education background. He was called to the Ontario (Canada) Bar and also passed the Chinese Bar examination. Leo is fluent in both Chinese (Mandarin) and English.

Jones & Co.67 Yonge Street, Suite 602 Toronto, OntarioM5E 1J8Canada

Tel: +1 416 703 5716Email: [email protected]: www.jonesco-law.ca

Jones & Co. is a multilingual law firm in Toronto, Canada. It provides legal advice to international businesses regarding the protection and distribu-tion of their goods and services. It is particularly known for its work in intellectual property, licensing and franchising, and international law. The firm has a well-established China practice and staff include native Chinese speakers.Experienced in both common law and civil law jurisdictions, the firm works for clients from Asia, Europe and the Americas, often coordinating work in several jurisdictions.With established expertise in a number of areas of law, and understanding of both common law and civil law systems, the firm finds innovative solutions to problems that more traditionally segregated practices may overlook.

www.jonesco-law.ca


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Chapter 9 61

England & Wales

Freeths LLP Iain Bowler

England & W

ales

Where the pyramid selling legislation applies, the franchisor (and any franchisee who is sub-franchising) will be under onerous obligations: (i) to include certain information and warnings in adverts; (ii) to include in any agreement with new sub-franchisees warnings and statements of rights and a 90-day cooling-off period; and (iii) imposing restrictions on the timing of certain payments.

It is essential that any multi-layer franchise falls outside the pyramid selling legislation. Regulation 3(b) of the Trading Schemes (Exclusion) Regulations 1997 (SI 1997/31) (as amended) provides an exclusion where all UK franchisees in the network are registered for VAT at all times.


English law contains no legal definition of a “franchise” or “franchisee”. Accordingly, whether a proposed licensee (being the only licensee in the UK) should be treated as a “fran-chisee” should be considered from a commercial point of view. However, the absence of any franchise-specific disclosure and registration laws in the UK makes this point theoretical, as the classification of the licensee as a “franchisee” has no regulatory compliance consequences.


There are no franchise registration requirements in the UK.


There are no mandatory disclosure obligations in the UK. However, Article 3.3 of the bfa’s Code requires bfa member franchisors to provide a copy of the Code to prospective fran-chisees, along with a “full and accurate written disclosure of all information material to the franchise relationship within a reasonable time prior to the execution of binding documents”. The Guide to the Code contains further guidance on the extent of “full and accurate written disclosure”.

Voluntary disclosure along the lines specified by the bfa Code is, however, one of the most effective ways of managing the risk associated with misrepresentation claims by franchisees.



“Franchise” is not defined under English statutes and there is no clear definition under case law.

The British Franchise Association’s (“bfa”) Code of Ethical Conduct (“Code”) (described further in question 1.9 below) adopts the following definition of “franchising”, taken from the European Code of Ethics for Franchising (“European Code”): “Franchising is a system of marketing goods and/or

services and/or technology, which is based upon a close and on-going collaboration between legally and finan-cially separate and independent undertakings, the fran-chisor and its individual franchisees. The franchisor grants its individual franchisees the right, and imposes the obligation, to conduct a business in accordance with the franchisor’s concept. The right entitles and compels the individual franchisee, in exchange for a direct or indi-rect financial consideration, to use the franchisor’s trade name, and/or trade mark and/or service mark, know-how, business and technical methods, procedural system, and other industrial and/or intellectual property rights. This is supported by the continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.”


There is no legislation specifically regulating franchising in the UK. General English contract, intellectual property, real estate and competition laws apply to franchising.

The franchising industry also self-regulates through the bfa and its Code. (See question 1.9 below.)

Pyramid selling legislation in the UK has specific application to franchising. This legislation applies to certain multiple-layered franchises, whereby the franchisee is encouraged (by the promise of a benefit or payment) to appoint sub-franchisees (who in turn may appoint other sub-franchisees) to promote and sell goods and/or services. Breach of the pyramid selling legislation can be a criminal offence. The pyramid selling legislation does not apply to a single-tier trading scheme (franchisor and one level of franchisee beneath it).


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The bfa requires its members to comply with:■ itsdisciplinaryprocedure;■ itscomplaintsprocedure;■ itsappealsprocedure;■ theAdvertisingStandardsAgency’sCodeofAdvertising

Practice (https://www.cap.org.uk/Advertising-Codes/Non-broadcast-HTML.aspx);

■ the Code (http://www.thebfa.org/about-bfa/code-of-ethics); and

■ certainreportingrequirements.The Code incorporates the European Code, along with

certain UK-specific provisions which clarify the European Code position.

The bfa has published a guide entitled “The Guide to the Code of Ethics”, which supplements the Code. This is not publicly available without charge, but can be purchased via the bfa’s website.

Because of the above, some franchisors are reluctant to become members of the bfa, notwithstanding that they may be highly reputable and ethical franchisors.


There is no legal requirement for franchise or disclosure docu-ments to be in English. However, a franchisor that provides documents that are not in English is unlikely to attract much interest in relation to the franchise system.

Note that Article 5.2 of the Code stipulates that every agree-ment and contractual arrangement in connection with the franchise should be written in, or translated into, the offi-cial language of the country where the individual franchisee is established.

Article 4 of the Code further provides that “franchisors should seek to ensure that they offer to franchisees contracts in a language in which the franchisee is competent”.



No, there are no laws that impose any such restrictions.


Small franchises can be sole traders or partnerships but most franchisors value the protection of limited liability and are therefore structured as limited liability companies. Franchisors can be public limited companies whose shares are listed on a recognised stock exchange.

When expanding into foreign markets, franchisors may estab-lish a presence in that country from which to service the local franchise network. In such cases, the franchisor may open a branch or establish a local subsidiary, or even enter into a joint venture with a locally-based entity, to benefit from the local party’s knowledge of, and established infrastructure in, the new territory. Tax and transfer pricing issues will need to be taken into account.


There are no mandatory disclosure obligations applicable to the sale of sub-franchises.

If the master franchisee is a member of the bfa then the pre-sale disclosure requirements specified in Article 3 of the Code apply, and the master franchisee will be bound to make the relevant disclosures. This will inevitably require the cooper-ation of the franchisor.

As noted above, appropriate disclosure is one of the most effective ways of managing the risk associated with misrepre-sentation claims by sub-franchisees.


There are no mandatory disclosure obligations either at the start of the franchise relationship or on a continuing basis.


There are no mandatory pre-sale disclosure obligations, so non-compliance is not relevant.


There are no specific laws governing the sale and purchase of a franchise.

Note that article 2.2 of the bfa’s Code obliges a bfa member franchisor to:(i) operate “a business concept with success, for a reasonable

time and in at least one pilot unit before starting its fran-chise network”;

(ii) be the owner, or have legal rights to the use of its network’s trade name, trade mark or other distinguishing identifica-tion; and

(iii) provide the individual franchisee with initial training and continuing commercial and/or technical assistance during the entire life of the agreement.


Membership of the bfa is not mandatory.However, many (but not all) franchisors become members of

the bfa as it operates as an accreditor of franchising companies as well as a Trade Association. Membership does carry certain obligations – see question 1.11 below.


The bfa provides a self-regulatory framework for its members and applies strict criteria for membership, relating to operational practices, business procedures, franchise agreement terms, and support offered to franchisees.


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“safe harbour” treatment under the Vertical Agreements Block Exemption if: it is for a term of more than five years; or the fran-chisee operates from premises or land owned or leased by the franchisor, for a term that exceeds the period of occupancy of those premises. If the supply agreement does not fall within the “safe harbour” treatment, any potential anti-competitive effect will require individual assessment based on market share data, which will vary from franchise to franchise.


Yes. In general terms, any restriction on a franchisee’s ability to determine its sale prices may be deemed a “hard-core restric-tion” under European competition law. Chapter 1 of the UK Competition Act 1998 imposes equivalent provisions which will continuetoapplytoUKbusinessfromJanuary2021onwardswhen the TFEU ceases to apply to the UK. The imposition of minimum resale prices is considered to be a “hard-core restric-tion”. The inclusion of a “hard-core restriction” will invalidate the entire franchise agreement and may also render the fran-chisor open to the payment of fines of up to 10% of worldwide turnover and claims for damages.

Maximum resale prices can be imposed, provided that the maximum is not set so low that it acts as a de facto minimum price.

There are some very limited exceptions to the prohibition on resale price maintenance. The Vertical Agreement Block Exemption Guidelines provide that in certain circumstances, resale price maintenance can be permitted; for example, in a franchise system, fixed resale prices may be permitted where necessary for the launch of a new product or to implement a short-term low price campaign (e.g. for two to six weeks) which will benefit consumers.


There are no statutory or relationship laws that govern the ques-tion of competing franchisees being granted neighbouring territories where one franchisee claims that its ability to opti-mise its income is being impaired due to the proximity of the neighbouring franchise. However, the English law principle of “non-derogation from grant” may be relevant. It is sometimes said that the principle of non-derogation from grant embodies the rule of common honesty. If A agrees to confer a benefit on B, then A should not do anything which substantially deprives B of the enjoyment of that benefit. The obligation not to derogate from grant is implied into the franchise agreement.

Under English law there is, at least as yet, no general overriding duty of good faith and fair dealing which applies to franchise agreements. There is a developing body of case law, however, which may be leading the courts to the position where they may be prepared to imply a general duty of good faith and fair dealing into certain “relational” contracts, including franchise agree-ments. Circumstances where the courts may be willing to imply such a term will be fact-specific and will require “a core value of honesty”. This is not a big stretch from the fundamental tenet that underpins the principle of non-derogation from grant, and so it is easy to see a way for the courts to find for a franchisee who has invested his or her life savings in a franchise, only to find a substantial part of the benefit of that investment being eroded as a result of “encroachment”.

In the case of multi-jurisdictional franchising, certain intel-lectual property rights might be held in a specific intellectual property holding company resident in a certain jurisdiction (e.g. Ireland or Luxembourg), to take advantage of beneficial tax rates.


Once a limited liability company has been duly incorpo-rated at Companies House, the company may begin trading. Information on incorporation requirements is available on the Companies House website. There are no additional registra-tion requirements relating to the commencement of business, although the company will have to register for corporation tax, VAT and employment withholding taxes with Her Majesty’s Revenue and Customs (“HMRC”).

3 Competition Law


The offer and sale of a franchise is subject to both European and UK competition law provisions relating to agreements between undertakings and the abuse of a dominant market position, namely Articles 101(1) and 102 of the Treaty on the Functioning of the European Union (“TFEU”) (which continues to apply during the Brexit transition period, which ends on 31 December 2020), the Vertical Agreements Block Exemption and the Technology Transfer Block Exemption and, in the UK, the Competition Act 1998 and the Enterprise Act 2002.FromJanuary2021theUKCompetitionandMarketsAuthority

(“CMA”) will no longer be able to enforce EU competition law and the CMA will have jurisdiction over all matters previ-ously reserved to the EU Commission. The EU Commission will no longer have jurisdiction to conduct dawn raids in the UK (though the CMA has similar powers) and may only issue infor-mation requests to businesses in the UK. Articles 101(1) and 102 oftheTFEUwillceasetoapplytotheUKfromJanuary2021.However, the EU block exemption regulations will remain in force as regards the UK until they expire. Accordingly, compa-nies carrying on business in the UK will continue to benefit from the exemptions if they meet the relevant criteria.


There is no maximum permitted term. If the franchise agree-ment contains territorial exclusivity provisions, then there may be restrictions that apply to the term of the franchise agreement if it is not to be regarded as potentially anti-competitive. This will require individual assessment based on market share data which will vary from franchise to franchise.


There is no maximum permitted term. If the franchisor requires the franchisee to purchase at least 80% of the products to be sold through the franchised unit from the franchisor or its nominated suppliers, the supply agreement will not qualify for the automatic


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ProcessIt is prudent to conduct searches to ensure the trade mark is not already being used by a third party. An official application must then be made to the IPO’s Trade Marks Registry (“Registry”). The Registry will examine the application and perform its own searches. This will include consideration of “absolute” (e.g. is the mark distinctive?) and “relative” (e.g. does the mark conflict with any earlier third-party right?) grounds for refusal, as set out in Sections 3 and 5 of the TMA. There is a substantial body of UK case law in relation to the registrability of trade marks.

Once any objections are resolved, the application will be advertisedintheTradeMarksJournalandobjectorsmayraiseobjections (generally within a two-month period). In the absence of any successful objections, the trade mark will be registered following the expiry of that period.

If the trade mark is to be used in EU, it may be preferable to obtain a Community Trade Mark (“CTM”) which applies across all European Union Member States. This can be achieved by making an application to the Office for Harmonization in the Internal Market. UK based businesses should therefore apply for a UK trade mark, and a separate CTM application will be necessary to cover any EU territories.

Effect of registrationThe proprietor of a registered trade mark has exclusive rights to use the mark and may sue any party who uses it without consent.

If a trade mark is not registered, the proprietor of the trade mark may have some common law protection under the tort of “passing off”. The general components for passing off are: goodwill; misrepresentation; and damage. It can be difficult (and expensive) to bring an action for passing off, so it is prefer-able to register the trade mark.


It is not possible to register general know-how, trade secrets and other business-critical confidential information in the UK. However, patents and certain design rights can be registered.

The law contains some protection of know-how, trade secrets and other business-critical confidential information, provided such information has “the necessary quality of confidence” and is “disclosed in circumstances importing an obligation of confi-dence”. Where those criteria apply, the provider of confidential information could bring an action for breach of confidence if it has suffered a loss due to it being used or disclosed without permission.

It is significantly easier to prove and enforce a breach of a contractual obligation of confidence than a right existing under general law, so it is preferable for the franchise agreement to include specific obligations defining “Confidential Information” and setting out the circumstances under which any confidential information can and cannot be disclosed. It is also prudent to take practical steps to protect confidential information by including appropriate notices on documents and restricting disclosure.


The Copyright, Designs and Patents Act 1988 (“CDPA”) provides copyright protection in the UK. A piece of work (recorded in any form) will receive automatic copyright protec-tion, provided the CDPA applies.

Franchisors need to be vigilant, as there are risks here. Granting a clearly defined exclusive geographic territory to each franchisee, and being clear about the geographical limits in fran-chise sale documentation, is one way of mitigating this risk.


Non-compete obligations are those that prevent a franchisee from being involved in a business that competes with the fran-chised business or that requires the franchisee to purchase from the franchisor/franchisor’s designated suppliers more than 80% of the franchisee’s total purchases – calculated by value or volume, depending on the segment of the market.

In general, in-term non-compete obligations are permitted where the duration is limited to five years or less, and there are no obstacles that potentially hinder the franchisee from termi-nating the non-compete at the end of this period (tacitly renew-able obligations that extend beyond five years will not work). Where the franchisee operates from premises and land owned or leased by the franchisor, the non-compete obligation may extend to the period of occupancy of those premises.

Importantly for franchisors, where there is a transfer of know-how and intellectual property rights, non-compete clauses may be permissible for the duration of the franchise agreement (irrespective of length) provided that: they are directly related to the franchised business; the primary object of the agreement is not to transfer such know-how or IPRs; and the non-compete clause does not contain any hard-core restrictions. These condi-tions are generally fulfilled under most franchise agreements.

Furthermore, a non-compete obligation on the goods or services purchased by the franchisee falls outside EU compe-tition law where the obligation is necessary to maintain the “common identity and reputation of the franchised network”, provided the non-compete obligation does not exceed the dura-tion of the franchise agreement itself.

In other circumstances, in-term non-compete obligations will be invalid, but without invalidating the entire franchise agreement.

Post-term non-compete obligations are not normally covered by the Vertical Agreement Block Exemption, except where the obligation is deemed indispensable to protect know-how trans-ferred by the franchisor. In that case, a one-year post-termination non-compete is permitted, provided it meets the following criteria:(i) it relates to products/services competing with the contract

product/services;(ii) it is limited to the premises from which the franchisee

operated during the contract; and(iii) it is indispensable to protect know-how transferred by the

franchisor, but this know-how is required to be classed as “secret”, which might be hard for a franchisor to prove.



In the UK, trade marks can be registered under the Trade Marks Act 1994 (“TMA”) (as amended) at the Intellectual Property Office (“IPO”).

A UK trade mark registration lasts for 10 years (from the date of the application) and can be renewed for further periods of 10 years, subject to the payment of renewal fees.


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Copyright subsists for specific periods, depending on the type of work and whether the creator is known. For example, under Section 12(2) CDPA, copyright for “literary, dramatic, musical or artistic works” (which could include an Operations Manual) lasts for 70 years from the end of the calendar year in which the author dies.

A “computer program” and “preparatory design material for a computer program” fall under the definition of “literary work” under Section 3(1) of the CDPA. However, the application of copyright protection to software is complex, so it is prudent to include specific contractual restrictions on the use, copying and dissemination of any software. Practical measures should also be considered, such as limiting access to source code.

5 Liability


There are no mandatory disclosure requirements in the UK. There is also no legal requirement for contracting parties to volunteer information, as the onus for diligence is on the purchaser under the principle of “Caveat Emptor ” (buyer beware). However, direct questions must be answered fairly and honestly.

A franchisee may bring a claim for misrepresentation against a franchisor that has made untrue statements of fact which led the franchisee to enter into the franchise agreement and suffer loss (see question 5.3). There are various forms of misrepresen-tation (i.e. fraudulent, negligent or innocent). The franchisee could also bring a tortious claim for negligent misstatement, but remedies for misrepresentation are generally more favourable.

Damages and rescission of the franchise agreement are avail-able as remedies for misrepresentation, although a court will order only damages for innocent or negligent misrepresenta-tion in lieu of any right of the franchisee to rescind the franchise agreement.


There are no mandatory disclosure requirements in the UK.In a typical arrangement (where the sub-franchise agreement

is made between the master franchisee and sub-franchisee), any liability for misrepresentation would rest with the master fran-chisee (as the parties need to have a contractual relationship to bring a claim for misrepresentation). The sub-franchisee could also bring a claim for negligent misstatement against each of the franchisee and the franchisor, if it could establish that the fran-chisor owed the franchisee a duty of care.

The Unfair Contract Terms Act 1977 (“UCTA”) imposes limits on the validity of exclusion clauses in standard form agreements. Franchise agreements are generally classed as standard form agreements, depending on how heavily they are negotiated.

Under UCTA, if an indemnity in a standard form agree-ment indirectly operates to exclude or limit a contracting party’s liability, then a court could strike out the provision as

“unreasonable”. As an example, this could apply to a wide obli-gation for the master franchisee to indemnify the franchisor for all of the master franchisee’s acts or omissions (as those acts or omissions could be caused by the franchisor’s own negligence).


The franchise agreement should include “entire agreement” and “non-reliance” clauses, which are designed to prevent either party from bringing a misrepresentation claim based on pre-sale/pre-contract data.

However, case law suggests that exclusions of fraudulent misrep-resentation are likely to be “unreasonable” under UCTA, and could be struck out. For this reason, a well-drafted agreement will confirm that it does not seek to exclude or limit liability for fraud or fraudulent misrepresentation, to try to ensure that exclusions of liability for negligent or innocent misrepresentation might survive.

Where the use of exclusion clauses leaves a claimant with no practical remedy against the other party, the courts are likely to consider such exclusions to be unreasonable, and strike them out. Franchisors should be mindful of the need, therefore, to leave a franchisee with some reasonable level of claim in the event of a breach or misrepresentation (subject to higher level limitations), or else risk being left with unlimited liability if the limitations of liability are struck out completely.


English law permits class actions, but these are less aggressive than the US equivalent. Class action waivers are enforceable, but are rarely used.

6 Governing Law


There is no legal requirement for franchise agreements to be governed by English law. However, to increase the market-ability of a franchise system in the UK, the majority of fran-chise agreements are subject to English law. In some limited cases, franchise agreements in the UK might be subject to the law of one of the US states, for example, but there is no gener-ally accepted norm where English law is not the governing law of the agreement.


UK courts will enforce judgments (including interim orders) made in courts of overseas jurisdictions.

There are wide-ranging enforcement regimes in place between the UK and various jurisdictions. In the absence of an enforce-ment regime with the relevant country, the English common law position would apply.


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The market remains mixed, with the retail and casual dining sectors experiencing very difficult trading conditions at the time of writing. It is normal to negotiate a rent free allowance to reflect the cost to the tenant of fitting out the premises – and this applies to most types of business premises. In many parts of the UK, it is also possible to negotiate additional rent free allow-ances by way of incentives to take a lease at market rent, due to the current balance of supply and demand. As already noted, this is especially relevant in the retail sector. However, in London and the South East, and other prime locations such as the major out-of-town retail parks, this is becoming more difficult as the local economy improves, although the full impact of Brexit is probably still to be felt. For substantial assets in growth sectors that are heavily dependent on location, such as hotels and quick service restaurants, local competition may result in key money needing to be paid. A premium will almost certainly be required for a long lease if it reserves a rent other than a market rent.

8 Online Trading


The proposed requirement effectively prohibits the franchisee from making passive sales outside its territory. A passive sale is one where the customer is located outside the franchisee’s allo-cated territory but has nevertheless approached the franchisee directly. Compare this to an “active sale” where the franchisee actively approaches the out-of-territory customer in an attempt to secure a sale.

A ban on passive sales is a “hard-core restriction” under European competition law, which provides that every franchisee must be allowed to use the Internet to sell its products or offer its services. Selling via the Internet is deemed by the European Commission to be a form of passive selling.

The inclusion of such a restriction in a franchise agreement could render the whole agreement void and unenforceable, and parties to the agreement could be exposed to significant fines and potential third-party damages actions.

The EU restriction on passive sales will be carried across into UKlawfromJanuary2021untiltheexpiryofthecurrentEUVertical Agreement Block Exemption Regulation on 31 May 2022. Beyond that, further clarity is required from the CMA concerning whether passive sales affecting sales to a UK market or a UK customer will be capable of falling within the scope of the prohibition on anti-competitive agreements set out in UK competition law.


There are no such limitations, although any obligations intended


Arbitration is a common and widely recognised means of resolving disputes, especially in relation to international fran-chise agreements that operate across geographic borders, whether from the UK to other countries or vice versa. The UK is a signa-tory to the New York Convention and the Geneva Convention, and so arbitral awards are internationally enforceable in the UK.

There are many different recognised rules of arbitration. Those frequently used in relation to the UK include the London Court of International Arbitration (“LCIA”) and the International Chamber of Commerce International Court of Arbitration (“ICC”). Different organisations impose different procedures and different cost structures, so it is worth taking advice to find the arbitral process that best suits your commercial requirements.

7 Real Estate


The typical length of a lease of certain types of commercial prop-erty has been falling over recent years. In the retail sector, leases of 10 years (with a right to break after five) or five years are common. In other sectors (such as hotels or licensed premises) where initial fit-out/investment costs are substantial, longer terms are normal – 20/25-year leases at market rent are common for licensed prem-ises/restaurants, and 99/200-year leases with low rents (but with an initial premium) are common for hotels.


Although this concept does not tend to be standard in precedent commercial leases, it is reasonably well understood that a fran-chisor may want rights to step into a failed franchisee’s lease, and appropriate wording to cover this issue can be included in the original lease with the landlord’s agreement. This would require the assignment of the lease to the franchisor (and that would generally require the franchisor to assume responsibility for the accrued liabilities of the franchisee to the landlord).


There are no general rules preventing non-UK entities from holding real estate assets. However, in practice, landlords generally prefer a local entity to be the tenant, as it is easier to issue legal proceedings against them. If the local entity is newly formed and without a trading history, the landlord may require a parent company guarantee, which is often given by the non-national holding company.


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franchisee. It is good practice for franchise agreements to contain a clause expressly stating that there is no relationship of partner-ship, agency or employment between the franchisor and franchisee, which can reduce the likelihood of potential liability. However, it remains a question of fact, and factors that may contribute to a risk of vicarious liability include: the degree of control the franchisor exercises over the franchisee’s day-to-day operations; whether there is common ownership of the franchisor and franchisee; and whether the franchisee was in fact acting as the franchisor’s agent (disclosed or undisclosed), notwithstanding any wording to the contrary in the franchise agreement. Controls intended to main-tain uniformity of appearance and products are typically consid-ered to be insufficient to create a duty under which a franchisor may be vicariously liable for a franchisee’s acts or omissions.



No, there are no such restrictions.


If the franchisee is resident in the UK but the franchisor is not resident in the UK and has no “permanent establishment” within the UK (i.e. a branch), royalties may be subject to UK with-holding tax, which would be deducted by the franchisee from payments to the franchisor. The amount (if any) of withholding tax payable will depend on whether there is a double taxation treaty between the UK and the country where the franchisor is based. Within the EU, payments between associated companies may be relieved from withholding tax. The ongoing relationship between the UK and the EU with regard to relief from UK with-holding tax will be subject to the final terms of any trade agree-ment between the UK and the EU that will apply following the end of the Brexit transition period on 31 December 2020.

Franchise fees sometimes include a combination of a royalty for the use of intellectual property rights (which is potentially subject to withholding tax) and payments for goods and services (which are not).


No, there are no such requirements.



Depending on the nature of the franchisee’s duties, there could be a risk that the franchisee is acting as the franchisor’s commer-cial agent.

to apply after termination or expiry of the franchise agreement should be expressly stated to “survive” the termination or expiry of the franchise agreement. It may also be worth considering the inclusion of a limited power of attorney (“POA”) in the franchise agreement, entitling the franchisor to effect such assignment if the former franchisee refuses to do so. Under English law, a POA must be executed as a deed, so careful attention needs to be paid to the execution formalities of any agreement which contains a POA.

9 Termination


No. However, see the comments on TUPE in section 14 below.


There are no statutorily imposed minimum notice periods that will have the effect of overriding the contractual notice period set out in the franchise agreement. See question 12.1 below relating to minimum statutory notice periods in relation to commercial agency agreements.



There is very little English case law addressing the issue of whether a franchisee or a franchisee’s employees can be treated as employees of the franchisor. In deciding the issue, typical consid-erations may include: whether the individual receives any wage or remuneration from the franchisor; the degree of control the fran-chisor exercises over the individual; and the provisions of the contractual documents. In a franchise network, it is unlikely that any employees of the franchisee will receive remuneration from the franchisor, and the income that the franchisee receives tends to be profit from the franchisee’s business, rather than remuner-ation. Further, although the franchisor indirectly may exercise some degree of control over the franchisee’s staff, this control tends to be limited to outcomes and not day-to-day control over the actions of individual employees. Nevertheless, the concept of joint employer risk is gaining momentum outside the US where it began, and is now recognised in a number of other common law and civil law jurisdictions. As such, it is not an issue that can be ignored when structuring the terms of franchise agreements and master franchise agreements that are to operate in the UK.


It is rare that a franchisor is found vicariously liable for the acts of a


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significance in the franchise scenario, where franchisors have an vested interest in a franchisee’s customer database for a number of valid commercial reasons, it is worth bearing in mind that unlike the previous Data Protection Act 1988 which regulated only “data controllers”, GDPR directly regulates “data proces-sors” as well for the first time.

Failure to comply with GDPR and the DPA 2018 will make businesses subject to competition law-style revenue-based fines as well as to private claims by individuals. This new regime represents a fundamental overhaul of the data privacy environ-ment which cannot be adequately summarised here.

Bribery: the Bribery Act 2010 created various new bribery offences. These include a Section 7 offence where a commercial organisation fails to prevent bribery on its behalf by a person it is “associated with”. Where such bribery takes place, the commer-cial organisation will only have a defence if it can show that it has adequate procedures in place to prevent persons associated with it from bribing. The offence has wide extraterritorial appli-cation, so a UK company or an overseas entity that carries on a business or part of a business in the UK can be prosecuted if the bribery takes place in the UK or overseas by a British citizen or someone with a “close connection” to the UK.

Modern slavery: the Modern Slavery Act 2015 requires busi-nesses to be transparent with regard to the slavery, forced and compulsory labour and human trafficking implications of their supply chains. Businesses that operate in the UK, which supply goods or services and which have an annual turnover (including all group companies) of at least £36 million are required to produce an annual Slavery and Human Trafficking statement. This applies to companies even if they are not registered in the UK if they carry on any business in the UK. Crucially for fran-chisors, the turnover of third-party franchisees does not count towards the £36 million threshold, even though it could be said that franchisees participate in the same supply chain as the fran-chisor. If a franchisee itself meets the threshold, it will have to prepare an annual statement.

Advertising and consumer protection: any promotions or advertisements should comply with the UK Committee of Advertising Practice Code of Non Broadcast Advertising, Sales Promotion and Direct Marketing (“CAP Code”) and its broadcasting equivalent. The Advertising Standards Authority administers these codes and investigates complaints.

Advertising is regulated by the Consumer Protection from Unfair Trading Regulations 2008 (which covers advertising to consumers) and the Business Protection from Misleading Marketing Regulations (which covers advertising to traders and comparative advertising). Significant consumer protection reforms are currently proposed to give consumers a direct right of redress.

UCTA: UCTA limits the franchisor’s ability to limit and exclude its liability through its standard franchise agreement (see question 5.3 above). Any exclusion clauses in the fran-chise agreement will only be valid if they are fair and reason-able. UCTA also prohibits limitations or exclusions of liability for death or personal injury caused by negligence.

Consumer Rights Act 2015: an act that consolidates and updates UK consumer protection law and provides a modern framework of consumer rights. The Consumer Rights Act combines the provisions of the Unfair Terms in Consumer Contracts Regulations 1999, UCTA, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 insofar as they relate to transactions with consumers.

Implied terms: the Sale of Goods Act 1979 (as amended) and the Supply of Goods and Services Act 1982 (as amended), to the extent that they survive the coming into force of the Consumer Rights Act 2015, imply certain terms into contracts, which

The franchisor’s risk profile would be significantly impacted if the franchisee is deemed to be a “Commercial Agent” for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (as amended) (“Regulations”). The Regulations include (amongst other non-excludable obligations) implied duties between the parties including good faith, the length of termina-tion notice, and an obligation for the principal to pay severance payments to its commercial agent following either termination or expiry of the agency agreement (other than in certain limited circumstances).

It is important to structure the franchise agreement to ensure the Regulations will not apply. The franchise agreement should include a disclaimer stating that the agreement is not intended to constitute an agency or partnership relationship between the parties. Such a disclaimer will not, however, be conclusive, as the strict legal status of the relationship will be determined on the facts.



There has been a great deal of activity in this area under English law since 2013, and the law continues to develop through successive decisions in the English and also the Irish courts. Nevertheless, at present there is no general duty of good faith and fair dealings in English contract law, although there is a school of thought that it is only a matter of time before the English courts will imply such a term into certain contracts, such as franchise agreements.

Under Article 2.4 of the European Code (incorporated into the bfa’s Code), each party is obliged to “exercise fairness in their dealings with each other” and “…resolve complaints, grievances and disputes with good faith and goodwill through fair and reasonable direct communication and negotiation”.



There is no specific “relationship” or other laws regulating the on-going dealings between franchisor and franchisee once the franchise agreement comes into effect. The Code contains general obligations on the franchisor in relation to its treat-ment of the franchisee throughout the term of the franchise agreement.

General principles of law will, however, apply.Data privacy: UK data protection legislation underwent huge

changes on 25 May 2018, when the EU General Data Protection Regulation (“GDPR”) came into force. As GDPR came into effect in the UK pre-Brexit, GDPR is now having a direct effect on businesses with operations in the UK.

Additionally, the UK Government enacted a new Data Protection Act 2018. The Act addresses how GDPR applies in the UK, including: (i) implementing certain derogations under GDPR that the UK Government negotiated; (ii) applying the new data protection standards to all areas, not just areas of EU competence; and (iii) repealing the Data Protection Act 1998 to avoid inconsistencies with GDPR. It is important therefore that GDPR and the DPA 2018 are read side by side. Of particular


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on the franchisee’s ability to transfer the franchise to a third party. However, it is more common for the franchise agreement to include an express assignment clause, setting out a process whereby the franchisee may transfer the franchise subject to the franchisor’s prior written consent (which may be conditioned in certain circumstances).


English law will recognise any express step-in rights set out in the franchise agreement. There are no registration require-ments or other formalities. The use of step-in rights tends to be sector- and context-specific, and may apply particularly in the retail and restaurant sectors if a franchisee has secured the lease of a key location. On the other hand, many franchisors do not want to get involved in commercial property transactions notwithstanding the relative attraction of any given location as a means of promoting the brand.


A POA does not need to be registered, but must be a written document validly executed as a deed under Section 1(1) of the Powers of Attorney Act 1971 (“POAA”).

To be valid, a deed must clearly state that it is a deed, be deliv-ered as a deed, and be executed in line with statutory require-ments (including the Companies Act 2006 requirements for limited companies, where appropriate). The POAA also contains specific requirements in relation to certifying copies of POAs.

While the attorneys should be clearly identified, it is legally permissible for a POA to specify a class of persons as being the attorney, for example, “any Director of the Franchisor”. Any person relying on the POA is likely to seek verification that the attorney is actually a director.



Increasingly, agreements are being signed remotely using elec-tronic means rather than being signed in a traditional way in a “completion meeting” attended by all of the parties. This is even more so in connection with cross-border transactions where the parties are geographically remote from each other.

include implied terms in relation to the satisfactory quality and fitness for purpose of goods sold or services provided.

Environment Agency CRC Energy Efficiency Scheme: the CRC Energy Efficiency Scheme Order (2010) (“Order”) obliges certain franchisors to participate in the Carbon Reduction Commitment (“CRC”) scheme and imposes liability on participating franchisors for failures by its franchisees who trade under its control and corporate name. This is different from the Modern Slavery Act regime which does not combine the activities of franchisors with those of their franchisees.

Transfer of Undertaking Regulations (2006) (“TUPE”): where TUPE applies to a transfer of an economic undertaking from one party to another, any employee rights will be trans-ferred from the transferor to the transferee. There have been instances where TUPE has been found to apply to franchising arrangements, and appropriate protections (including indemni-ties) should be included in the franchise agreement where this could apply.



Please see question 1.5 above.


There are no mandatorily imposed rights in relation to auto-matic renewals of a franchise agreement at the end of the initial or any subsequent term.

However, Article 6 of the Code states that: “The basis for contract renewal should take into account the length of the orig-inal term, the extent to which the contract empowers the fran-chisor to require investments from the franchisee for refur-bishment or renovation, and the extent to which the franchisor may vary the terms of a contract on renewal. The overriding objective is to ensure that the franchisee has the opportunity to recover his franchise-specific initial and subsequent invest-ments and to exploit the franchised business for as long as the contract persists.”


No compensation or damages will be payable unless the contract provided for an extension right which the franchisor refused to honour (in which case contractual damages for breach could apply).



The franchise agreement can include an absolute prohibition


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also unprecedented. The effect on sales, the reliance of supply chains and the integrity of franchise systems themselves can be seen everywhere, and unlike the situation in previous economic recessions, franchising as a concept is not necessarily standing out from the crowd as a more sustainable business model.

Many franchisees are small businesses, and despite support from the UK Government and from their franchisors, will not have the depth of resources to weather a long-term downturn in business. We have seen franchisees trying to use force majeure clauses as a reason to abandon their franchise agreements and others who have simply run out of working capital and gone out of business.

Different sectors will be affected differently, with tourism, travel and the hospitality sector being most severely impacted. The food and beverage sector had a welcome boost during August with the UK Government’s “Eat out to Help Out” scheme causing a significant increase in people dining out as part of the UK’s relaxation of lockdown. Other sectors are likely to see a windfall benefit, with cost reduction and business efficiency franchises seeing a significant increase in new franchisee enqui-ries and with an unprecedented number of potential franchisees coming into the market from employment and considering fran-chising as a more attractive option for the future.

Franchisors have generally supported their franchisees well during this difficult time. It is essential that franchisors look after their franchisees and invest in their franchisee’s customer base, helping franchisees adapt quickly to the ”new normal” – launching online ordering apps and home delivery services in the F&B sector and developing multi-channel distribution capa-bilities in the retail sector. There will also be new opportuni-ties for new franchise systems to emerge specifically designed to address issues that have been encountered for the first time as a result of the coronavirus pandemic, creating new opportunities for franchisors and new franchisees.

Electronic signatures create a way to sign franchise documents in the online world, as one signs with a pen in the offline world. Depending on the type of electronic signature – a simple elec-tronic signature, e.g. a scanned copy of a “wet ink” signature; an advanced electronic signature, which is uniquely linked to the signatory and capable of identifying them; or qualified elec-tronic signatures, which are created using a signature creation device – the process for executing the document will differ.

The EU Electronic Signatures Directive 1993 created a legal framework for electronic signatures. This framework has been implemented into English law by the Regulation on electronic identification and trust services for electronic transactions in the internal market (“eIDAS”). The eIDAS Regulation ensures the recognition of electronic signatures in legal proceedings, thus enabling binding legal agreements to be executed in this way.


The short answer is “yes”, so long as you are confident that you will always have access to the electronic copy of the document, so that it can, if necessary, be produced in evidence if there is a dispute as to its terms or meaning, or if it is to be the subject of an inquiry or due diligence exercise. This then illustrates the need to have an effective, robust and secure document manage-ment system on which your digital records can be stored and accessed. Remember also to ensure that your digital records are backed up and that you have a disaster recovery plan in place to enable you to access your contracts and other critical documents in the event of a cyber-attack or some other disabling interrup-tion to your business.



The coronavirus pandemic is an unprecedented disaster of almost biblical proportions. The most devastating impact is the loss of life on a global basis, but the economic impact is


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Freeths LLP

Iain Bowler qualified in 1988 and specialised in M&A, stock exchange and complex commercial and joint venture work. Between 1998 and 2002, Iain was Director of Corporate Finance at a corporate industrial developer headquartered in the UK and USA. He joined DLA Piper as a Partner in 2002 and was global Co-Chair of the Commercial Contracts and Franchise and Distribution Groups before joining Freeths as Head of the Commercial and Franchise Group in 2019.Iain’s work includes commercial transactions of all descriptions, including supply chain management, procurement of goods and services, outsourcing, manufacturing, logistics, consultancy and services agreements, direct sale, agency, franchise, distribution, brand licensing, e-commerce and international trade. Iain is ranked as a “leading individual” for franchise work in The Legal 500 and Chambers, is listed in the global Who’s Who Legal for franchise work and is an Acritas™ Star Lawyer. Iain is an Affiliate Member of the British Franchise Association.

Freeths LLP1 Vine StreetMayfairLondon, W1J 0AHUnited Kingdom

Tel: +44 845 030 5767Email: [email protected]: www.freeths.co.uk

Freeths LLP is a top-50, full-service commercial law firm with 13 offices across the UK. One of the UK’s fastest-growing law firms, Freeths has over 1,000 staff and turnover in the last financial year in excess of £100 million. The Legal 500 and Chambers legal directories consistently rank Freeths’ lawyers in their top tiers. We have franchise experts in a number of our offices advising clients on all manner of franchise and distribu-tion contracts. We have extensive experience in structuring, negotiating and documenting franchise transactions in the UK and internationally, including multinational master franchise, area and regional developer and area representative arrangements, joint ventures and other distribution and brand licensing relationships. Our clients come from all sectors and

cover a broad spectrum of size and experience, from entrepreneurs and companies that are establishing new programmes, to large franchisors, manufacturers and distributors.

www.freeths.co.uk


Franchise 2021

Chapter 1072

France

LINKEA Clémence Casanova

Cecile Peskine

France

There is, however, no obligation on the Franchisor to register their franchising activity, or to register the franchise agreements executed with Franchisees. The trademark licence granted to the Franchisee may, however, be registered before the trademark office that has generated the related trademark (for a national brand, said office is called “INPI”), even if there is no obligation to do so.


Pursuant to article L.330-3 of the French Commercial Code, the Franchisor must provide the Franchisee with a “Pre-contractual Information Document” (disclosure document) at least 20 days before the signing of a franchise contract, and at least 20 days before the payment of any sum or any investment in relation to the franchise relationship.

This disclosure document shall contain the following infor-mation, which is detailed at article R.330-1 of the French Commercial Code: ■ the Franchisor’s information (company name, registered

office, form, capital, manager, registration number);■ their trademark registration number and registration

number of the trademark licence agreement, if relevant; ■ the Franchisor’s banking information (bank address,

account number); ■ theFranchisor’sauditedfinancialstatementsregardingthe

past two years; ■ the history and presentation of the company and of the

network; ■ the general and local market “statements” (presenta-

tion) and development prospects of the general and local market;

■ alistoftheundertakingsofthenetwork,andthenatureof their relationship with the Franchisor (franchise agree-ment, subsidiaries, joint ventures, etc.);

■ the address of the franchised undertakings located inFrance, conclusion and renewal dates of the related fran-chise contract;

■ the number of Franchiseeswhich have left the networkthe year before the issuance of this document, detailing whether this has resulted from expiry, cancellation or termination of the contract;

■ thepresenceofanyundertakingmemberofthenetworkinthe same territory, and distribution of services or products that are the subject of the franchised business in the same territory;

■ themost important provisions of the contract: duration;renewal; termination; assignment; and exclusive rights; and

■ theinvestmentslinkedtothefranchiseoperation.



Under French law, there is no regulation that defines a fran-chise. The franchise definition has been constructed by the French Courts and authors, and any relationship containing the following elements is considered a franchise agreement:■ arighttousearegisteredtrademark;and■ thetransferofknow-how.

Even if the relationship is not qualified by the parties as a franchise agreement, each agreement containing the abovemen-tioned elements might be regarded as a franchise agreement, and implies that the Franchisor provides the Franchisee with support, the final aim being the profitability of the franchise business.


The offer and sale of franchises is specifically regulated by articles L.330-1 and R.330-3 of the French Commercial Code – which covers in general all exclusive trademark licence relationships.

Franchise operations are also governed by French contract rules which are established in the French Civil Code, as well as by the general rules applying to all commercial relationships in the French Commercial Code.


Yes, this person will be regarded as a “Franchisee” and treated as such even if it is the only franchisee in the French territory. However, if this unique “Franchisee” is entitled to sub-franchise its rights in the French territory, it may be regarded as a “Master Franchisee”.


Under French law, the only registration requirement relating to the franchise system is to deposit and register the trademark that will be granted to the Franchisee.


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franchise disclosure document and franchise agreements comply with the European Code of Ethics for Franchising.


There is no mandatory obligation to translate the documents into French. However, translation is strongly advisable, particu-larly in order to be able to prove that the Franchisee has been provided with clear and understandable information before signing the franchise agreement.

In the course of a litigation, French Courts will require an offi-cial translation of any documents drafted in a foreign language.



No, there is no longer any such regulation under French law, unless it concerns sensitive sectors that might cause harm to public policies, public security, national defence interests or activities related to the production of weapons. In these limited cases, the related investment shall be subject to the Minister of Economy’s prior approval and declared to the French Treasury Tax Department.


Private limited liability companies – such as société par actions simplifiée, société à responsabilité limitée or société anonyme – are usually chosen by Franchisors. These three types of company are easy-to-build vehicles for the operation of commercial activi-ties in France. The Franchisor will choose the most accurate type, taking into account its resources as well as social and tax considerations.


Even if the Franchisor is operating through a foreign company, there are obligations to be registered with the French Répertoire des Entreprises (register for undertakings) or the National Centre for Foreign Companies, as well as the French law administration.

These obligations are described here: https://www.service-public.fr/professionnels-entreprises/vosdroits/F31191.

3 Competition Law


The offer and sale of franchising is regulated by: ■ ArticlesL.420-1andsubsequentoftheFrenchCommercial

Code, which prohibit anti-competitive practices where they are intended to: fix prices; restrict market access; restrict or control production, opportunities, investment or technical progress; or divide up markets or sources of supplies. Any

The Franchisor shall also deliver any other information that may be relevant in the candidate’s decision to enter into the fran-chise agreement. This general obligation was incorporated into the French Civil Code in 2016.


Yes, the obligation to provide a Pre-contractual Information Document complying with articles L.330-3 and R.330-1 of the French Commercial Code also applies to sales performed to Sub-Franchisees. The Master Franchisee in charge of recruiting the Sub-Franchisees located in France shall thus provide the candidate for a sub-franchise agreement with the Pre-contractual Information Document at least 20 days prior to the related sub-franchise agreement’s execution and at least 20 days before any payment or investment in relation to the sub-franchise relationship.


The disclosure document shall contain the information listed at articles L.330-3 and R.330-1 of the French Commercial Code, which are detailed in question 1.5 above. However, there is no format prescribed by the law.

The disclosure document shall be updated for each candidate.There is no obligation to provide updated information to the

current Franchisees during the franchise relationship.


The consequences are the same as those described in question 5.1 below.


French Courts dictate that the Franchisor has a duty to exper-iment with or test the concerned business and concept before franchising it, and will usually request the Franchisor to prove that the concept has been operated in owned operations for at least two years before the franchise development started, and that this experimentation has been profitable.


Membership of a national franchise association is not mandatory. However, membership of the French Federation for Franchising (Fédération Française de la Franchise) is advisable, inter alia, since the Fédération Française de la Franchise provides training regarding franchising in France, and contributes to Franchise Expo Paris, which is a well-known annual French franchise exhibition.


The Fédération Française de la Franchise will, inter alia, verify if the


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These four conditions must all be satisfied.In-term non-solicitation of customer obligations are valid

only if the Franchisee has been granted an exclusive territory and if it is to prevent the Franchisee from performing active sales outside this territory (passive sales outside the Franchisee’s territory cannot be prohibited).

Post-term non-solicitation of customer obligations are not valid: the Franchisee shall remain the owner of its customers database and is entitled to use it after the agreement’s termina-tion, under the condition that such use shall not be made with the Franchisor’s trademarks or distinctive signs. However, the franchise agreement may expressly provide that Franchisor is the co-owner of the customers database and thus entitled to keep using it after the franchise agreement termination.



Trademarks must be registered in order to be protected.The Franchisor is able to register a national French trademark

before the French National Register (“INPI”) or a European trademark before the European Union Intellectual Property Office (“EUIPO”).


Know-how, trade secrets and other business-critical information are not protected per se under French law. However, the Franchisor may request the Franchisee to sign a non-disclosure agreement listing precisely which information and data shall be regarded as confidential and not disclosed to third parties, and shall only be used for the need to perform the franchise agreement.


Copyright protection may only apply if the Franchisor is able to demonstrate that the operations manuals or other data are original.

Also, French law does not protect ideas or concepts. Therefore, work needs to be sufficiently materialised in a devel-oped form to be eligible for copyright protection.

5 Liability


Failure to provide the mandatory disclosure document may incur (i) the cancellation of the contract, or (ii) the Franchisor’s liability.

(i) Cancellation of the contractFailure to provide the said information may be regarded as fraud-ulent, justifying the cancellation of the franchise agreement.

abuse of a dominant position or economic dependency, and any predatory pricing that might upset the balance of economic activities, are also prohibited. However, such anti-competitive practices might become permitted if they lead to economic progress and give final users a fair share of the resulting benefits. But the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the related products.

■ ArticlesL.442-1andsubsequentoftheFrenchCommercialCode, which prohibits restrictive trade practices, such as resale below costs and the “brutal” termination of estab-lished commercial relationships.

Franchise networks active in France shall also comply with the European regulation regarding anti-competitive practices. In particular, Commission Regulation EU no. 330/2010 of April 20th, 2010 (on the application of article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices) shall apply, together with the Guidelines on Vertical Restraints 2010/C 130/01.


There is no maximum permitted term provided per se for fran-chise agreements. However, exclusive supply agreements are only permitted for a limited duration. See question 3.3 below.


Pursuant to article L.330-1 of the French Commercial Code, any exclusive supply agreement shall be limited to 10 years.


French and EU regulations prohibit the imposition of any minimum resale prices.


Under French law, the Franchisor has no obligation to provide the Franchisee with an exclusive territory. If he does so, the Franchisor has a duty not to open – directly or indirectly – another point of sale in the Franchisee’s exclusive territory.


In-term non-compete obligations are enforceable under French law.

Post-term non-compete provisions are regulated by article L.341-2 of the French Commercial Code, under which non-compete provisions are valid only if they are:■ limitedtotheproductsand/orservicessubjecttothefran-

chise agreement;■ limitedtothelocationwheretheFranchiseewasoperating

its activity; ■ justifiedbytheneedtoprotectthetransferofsubstantial,

specific and secret know-how; and■ limitedtoaone-yearduration.


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pre-contractual information, the Franchisee should have asked about the relevant details before contracting and had been at fault not to do so.

(ii) Franchisor’s civil liabilityEven if the missing information has not been regarded as justifying the cancellation of the franchise agreement, the Franchisor may be held liable, and ordered to indemnify the Franchisee’s damage.

Indeed, the Franchisee may demonstrate that the knowledge of the missing information might have led him to enter into the agreement on different conditions, and that the absence of this information had caused him damage.

For instance, the Paris Court of Appeal considered that the Franchisee’s damage consisted of the absence of having the opportunity “not to contract” or “to limit its financial obli-gations” (e.g. Paris Court of Appeal, September 20th, 2000, confirmed by the Cour de Cassation, Commerciale, February 4th, 2004).

However, the Franchisee still has to demonstrate the exist-ence of a direct link between his damage and the Franchisor’s failure to provide the Pre-contractual Information Document.


Usually, the Master Franchise Agreement will provide an obli-gation – for the Master Franchisee – to comply with all manda-tory local regulations and to provide Sub-Franchisees with any required disclosure document. In such a case, the Master Franchisee will be liable towards its Sub-Franchisees for disclo-sure non-compliance or pre-contractual misrepresentation, except if such non-compliance or misrepresentation found its origin in the information or element provided by the Franchisor to the Master Franchisee.


No, such disclaimer clauses shall be regarded as unenforce-able, since the obligation to provide pre-contractual informa-tion complying with articles L.330-3 and R.330-1 is mandatory under French law.


To date, there is per se no class action proceeding open to Franchisees regarding a franchise agreement. Class actions are limited to litigation concerning B-to-C relationships. Class action waiver clauses are, in consequence, purposeless.

However, several Franchisees may decide to bring the same individual action against their Franchisor. Also, the French Minister of Economy or the Public Prosecutor is entitled to sue the Franchisor in case it is in breach with mandatory regulations governing “restrictive trade practice”. The Franchisees may in such case join the claim brought by the Minister or the Prosecutor to request damages compensating their own prejudice.

However, the cancellation of a franchise contract is subject to the demonstration, by the Franchisee, that the incomplete information/absence of pre-contractual information has inval-idated his consent to the contract (Cour de Cassation, Commerciale, February 10th, 1998).

Therefore, the French Courts analyse if the information provided by the Franchisor is sincere and verify if a part of it has been consciously hidden from the Franchisee in order to make him enter into the contract, and/or if missing information that should have been disclosed would have led the Franchisee not to enter into the franchise agreement. Many decisions state that the Franchisor’s presentation is very general and imprecise, or even incorrect, which characterises wilful misrepresentation and justifies the cancellation of the agreement (e.g. Cour de Cassation, Commerciale, May 6th, 2003).

On February 11th, 2003, the highest French Court specified that the obligation to give a sincere presentation applies not just to the information that is required by articles L.330-3 and R.330-1 of the French Commercial Code, but also to any other facultative information voluntarily given by the Franchisor to the Franchisee before it entered into the agreement.

Court cases have tended to focus on business plans/figures provided by Franchisors to future Franchisees. Even if the Courts admit that the Franchisee should personally proceed with a precise analysis of the future commercial operation in order to measure the potential of the business, the Franchisor must ensure that the business plans/figures provided to the Franchisee are not unrealistic or over-optimistic.

On October 26th, 2006, Orleans Court of Appeal was particu-larly clear on this: “Even if the Law doesn’t oblige the Franchisor to provide local

market research or to establish provisional operating accounts, this task being up to the Franchisee who shall, regarding his investment, proceed to this analysis and evaluate the related risks; it is constant that when providing this information and particularly business plans, the observance of article L.330-3 and of the general obligation to act in good faith in contract law requires the Franchisor to give a sincere presentation of the local market and to establish reasonable budgets by reference to tangible sales figures. […]

Even if the Franchisor is not due to get the results when establishing a provisional operating account, in consideration of commercial contingencies and hazard inherent to every forecast, he must carry out the statistical, economic and financial tools he can get as a fran-chise professional in the relevant market as well as conduct sufficient research on the local market to provide a reliable provisional study, as this information could be outside the knowledge of the Franchisee candidate. The significant gap between the forecast and the results testifies to the levity of this study.” (Our translation.)

Inthesamefield,theCourtofAppealofVersailles,onJune7th, 2007, ruled that a gap of 50% between the Franchisor’s fore-cast and the results is not sufficient to involve the Franchisor’s liability, as the provisional plan was based on the average sales figures of the time period for equivalent shops effectively gener-ated in the same geographical area. The Franchisor’s obliga-tion to give sincere and loyal information was thus fulfilled, the Court also confirming the Franchisee’s obligation to make enquiries on the project’s profitability and to verify the infor-mation given by the Franchisor, with the assistance of profes-sionals if necessary.

Courts can also be very tolerant of Franchisees’ behaviour if they had no previous experience in the operation of a commer-cial activity before executing the franchise contract. Thus, the highest French Court, on April 3rd, 2007, ruled against the reasoning of the Court of Appeal which had limited, without any debate, the amount of damages to be awarded to the Franchisee because it considered that, with non-existent or imprecise


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This concept is enforceable under French law if the franchise agreement, as well as the lease agreement, so provide. Indeed, the Lessor has to expressly agree with that principle.


To our knowledge, there are no restrictions on non-national entities holding an interest in real estate.


The answer depends on the location, but the French market is usually known to be a very expensive market for real estate costs, in particular concerning “A” locations or mall locations, where key money is indeed generally demanded by landlords.

It is therefore very exceptional to be able to negotiate a rent-free period when entering into a lease agreement, unless specific circumstances justify this free period (such as a need to revamp the location, or a revamping being in progress around the location).

8 Online Trading


No, pursuant to EU competition guidelines on vertical restric-tions, it is not possible to require the Franchisee to refuse “passive sales” and redirect said sales to another Franchisee.


Local domain names deposited by the Franchisee can remain in their ownership after the termination or expiry of the agreement, unless they contain a trademark registered by the Franchisor. In this case, the Franchisor will be allowed to force the Franchisee to transfer the related domain names. It is recommended to antici-pate this situation and insert a clause in the franchise agreement prohibiting the Franchisee to deposit any domain name containing any trademark and/or distinctive sign of the Franchisor.

9 Termination


French Courts are within their rights not to apply the termi-nation rights provided in the franchise agreement in case the termination has not been caused by a breach of a party and is “brutal”. French Courts can thus allocate damages to the party suffering from such brutal termination.

6 Governing Law


Parties are free to decide to submit the franchise relationship to French or any other foreign law.

However, French mandatory regulations cannot be circum-vented by using a “choice of law” clause. Therefore, even if French law is not applicable to the Franchise relationship, a disclosure document shall be provided in accordance with French mandatory regulations as long as a French Franchisor is involved or if the Franchise is aiming to operate its activity in France.


The French Civil Procedure Code provides for general urgent injunctive relief and injunction, which may be sought by the Franchisor before local courts in order to immediately stop any such damage or misuse.

Orders from foreign courts may also be enforced by the French Courts, taking into consideration international treaties and European regulations.


In France, arbitration is recognised as a viable means of dispute resolution. France is one of the first signatories to the New York Arbitration Convention, and, as such, accepts the enforce-ment of foreign arbitral awards. It is indeed recommended to insert into the agreement the arbitration rules and bodies that will govern the arbitration proceeding to avoid any debate after-wards in this respect. There are specialised arbitration bodies with their own rules, such as the Fédération Française de la Franchise, the Marseille Arbitration Chamber for Europe, Africa and Asia, and the Paris Centre for Mediation and Arbitration (“CMAP”).

7 Real Estate


Commercial lease agreements are executed for a nine-year duration. However, the tenant has the right to terminate the commercial lease agreement every three years.



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and alone bears all liabilities related to its employees’ acts and omissions.

In order to mitigate the risk of a claim directly brought against the Franchisor, the Franchisee has a duty to inform third parties of the fact that it is acting as an independent Franchisee. Such information shall be indicated in the shop, as well as in all commercial documents of the Franchisee.



No, there are no such restrictions.


Yes, royalties will be taxed at a 33.33% rate, unless a treaty for the avoidance of double taxation has been entered into between France and the country of origin of the Franchisor. Any arrangement in order to reduce and/or avoid a tax payment may be regarded as fraudulent. Therefore, any specific avoid-ance strategy shall be subject to the specific advice of a French specialised attorney.


There are no specific requirements other than those provided by French tax law.



Such a risk does exist in the case that the Franchisee is acting on behalf of the Franchisor. In order to mitigate this risk, it is, inter alia, necessary to make sure that the Franchisee is the owner or tenant of his location, and is directly paid by consumers.



All agreements governed by French law are required to be performed in compliance with a general good faith principle. However, there is no test of fairness which needs to be done, and Judgeswill assesswhether theFranchisor’s bad faith hasincurred damages to the Franchisee.

Also,Judgeshavetherighttomoderate,reduceorincreaseapenalty clause.


Article L.442-1, II of the French Commercial Code provides that: “Any (legal or natural) person operating production, distribution or

service activities that terminates abruptly, even partially, an estab-lished commercial relationship, without written notice having regard to the duration of the business relationship by reference to usage of trade or to trade agreements, shall be liable towards its counter-part and indemnify the latter of the related damage.

In the event of a dispute between the parties regarding the duration of the prior notice period, the party at the origin of the termination shall not be held liable for an insufficient duration of the prior notice period if a prior notice period of eighteen months has been granted.

The provisions of this § II shall not prevent the right for a party to terminate the related relationship without notice, in the event of non-performance by the other party of its obligations or in the event of a ‘force majeure’ event.”

This rule shall be complied with even in the case where an agreement provided the prior notice period applicable to the contractual relationship.

Furthermore, it is frequently the case that French Courts increase the prior notice period provided in the franchise agree-ment, taking into consideration the length of the relationship between the parties, the notoriety of the products concerned by the agreement, the dependence of the party victim of the termi-nation towards the other party, the possibility to source rapidly new counterparts in order to perform the same business, or the fact that there would be some unamortised investments linked to the relationship after the termination of the agreement.



There is such a risk if the Franchisor acts as the employer of the Franchisee’s employees, in particular if the Franchisor gives them instructions, and is in charge of the labour law duties.

In order to mitigate this risk, it is strongly recommended that the Franchisor has no direct relationship with the Franchisee’s employees, except for the training to be provided by the Franchisor directly to the Franchisee’s staff regarding the appli-cation of know-how.

There is also a risk that the franchise agreement might be qualified as an employment agreement, if the Franchisee is not independent from the Franchisor.


The Franchisee is, in essence, independent from the Franchisor


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No, there is no such step-in right, the Franchisee being the owner of its business.


This is not applicable in France.



French law recognises and values electronic signature as equal to physical signing, provided that it uses a reliable means of identifi-cation that guarantees its link with the act to which it is attached. The reliability of these means shall be presumed, until proof to the contrary, when an electronic signature is created, when the identity of the signatory is assured and when the integrity of the act is guaranteed, under the conditions laid down by decree of the Conseil d’Etat (article 1367 of the French Civil Code).

Therefore, an electronic signature may be used by Franchisors, but it is not common, physical signing being always preferred.


French law recognises a reliable copy as having the same probative value as the original. The reliability of the copy shall be presumed, until proof to the contrary is provided, when the integrity of the act is guaranteed, under the conditions laid down by decree of the Conseil d’Etat (article 1379 of the French Civil Code). Therefore, for safety reasons it is recommended to keep the original.



The COVID-19 pandemic may impact the ability of head of networks to develop their own operations as their finan-cial means could be affected by the related economic crisis. Therefore, it may lead to a strategy of developing Franchise oper-ations rather than owned operations. On the Franchisees’ side, unemployed persons due to the pandemic may decide to create their own businesses and therefore join a Franchise network to benefit from the related advantages of implementing a “ready to use” and known concept.



The relationship between the parties will be governed by the general principles of civil and commercial French laws and regulations.

Furthermore, even though France is not a case-law juris-diction, as may be the case in common-law countries, French case-law regarding franchise litigation should also be taken into account when drafting and performing a franchise agreement.



If the renewal is operated through a new franchise agreement, the Franchisor has a duty to provide the Franchisee with the mandatory disclosure document (see question 1.5 above).


No, unless the Franchisor has expressly made such a commit-ment in the franchise agreement or in a separate document.


Yes, if the refusal is abusive or “brutal”, which could be the case, for instance, if they had requested the Franchisee to undertake substantial investments/revamping costs in the concept a few months before the termination, where those costs have not been amortised on the expiry date and where the Franchisee would be forced to stop using said concept after the term of the agreement.



Yes, the franchise agreement is considered as executed intuitus personae, in consideration of the Franchisee’s person.

Consequently, it is possible to provide a first refusal right in favour of the Franchisor.



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LINKEA

Cecile Peskine is a member of the Paris Bar, Partner at Linkea, assisting and defending Franchisors and head of networks. Education: ■ Degree in law “DJCE” from Montpellier University, France.■ Specialisation certificates in Economic and IP law.Membership: ■ Expert before the French Federation for Franchising (Fédération Française de la Franchise).■ Vice-President of the IFLA (International Franchise Lawyers Association).■ Teacher at Sciences Po Paris.■ Member of the Club de la Franchise.Main Areas of Practice: ■ Distribution.■ Franchising.■ Communication.■ Consumer law.■ Commercial lease.Languages: ■ French.■ English.

LINKEA37 passage du Désir75010 ParisFrance

Tel: +33 1 8508 0508Email: [email protected]: www.linkea-avocats.com

Clémence Casanova is a member of the Paris Bar, assisting and defending Franchisors and head of networks. Education: ■ Degree in law “DJCE” from Montpellier University, France.■ Specialisation certificate in Economic law.Main Areas of Practice:■ Distribution.■ Franchising.■ Communication.■ Consumer law.■ Commercial lease.Languages:■ French.■ English.

LINKEA37 passage du Désir75010 ParisFrance

Tel: +33 1 8508 0508Email: [email protected]: www.linkea-avocats.com

LINKEA is a French law firm specialised in the field of distribution and consumer law, exclusively dedicated to head-of-network matters (e.g. Franchisors and concessionaires).LINKEA lawyers advise their clients while drafting the contractual elements needed (franchise, affiliation, licence, master franchise, commercial agree-ments, general terms and conditions, B-to-C agreements), training them in pre-litigation skills, and representing their clients before the French Courts and arbitration jurisdictions.

www.linkea-avocats.com


Franchise 2021

Chapter 1180

Germany

Noerr LLP Dr. Tom Billing

Germ

any


As there are no specific laws on franchising in Germany the same general provisions that would apply to a franchise system with more than one franchisee/licensee apply. However, the application of the same general provisions with regard to disclo-sure requirements will lead to a reduced amount of information that needs to be provided to the franchisee given that the fran-chisor has less experience and information itself. In order to comply with its disclosure obligations, the franchisor needs to disclose to the franchisee/licensee the fact that he is the first/only franchisee and that therefore the franchisor is not able to provide him with information/experience regarding other fran-chisees (see also question 1.5).


There are no specific government consents or official authorisa-tions required relating to the offer and sale of a franchise.


Under German law, pre-contractual disclosure in connection with franchise contracts is not regulated by a special statute or monitored by a specific agency. Only the general provi-sions regarding the opening of contractual negotiations apply, in particular the principle of culpa in contrahendo. This principle provides that before the conclusion of a franchise contract, the franchisor must ensure that all relevant facts have been clearly presented to the potential franchisee. The scope and content of the duty depend on each individual case, taking the experience and knowledge of the franchisee into account.

German courts have stressed that, as a general rule, the fran-chisee is obliged to obtain information at its own initiative about the general market conditions and their impact on the prospec-tive franchise business. However, if there are particular circum-stances of which only the franchisor is aware and which are recognisably of importance to the potential franchisee’s deci-sion as to whether entering into the franchise contract or not, the franchisor must disclose such information. It also follows from German case law that the franchisor must refrain from providing misleading information on the franchise system and



There is no statutory definition of ‘franchise’ or ‘franchising’ in Germany. The German Franchise Association (GFA) (www.franchiseverband.com) provides a definition (recognised in parts by the courts) as follows: Franchising is a sales and distribution system by means of which goods,

services or technologies are marketed. It is based on a close and ongoing cooperation between legally and financially separate and independent companies, the franchisor and the franchisees. The franchisor grants its franchisees the right, at the same time as imposing the obligation on them, to conduct a business in accordance with the franchisor’s concept. This right entitles and obliges the franchisee, in return for direct or indi-rect remuneration, to use the system’s name, trademark, service mark, copyright and/or other intellectual property rights, as well as know-how, economic and technical methods and the business system of the fran-chisor, under ongoing commercial and technical support by the fran-chisor, within the framework and for the term of a written franchise agreement, concluded between the parties for this purpose.


In Germany, there are no specific laws or government agencies that regulate the offer and sale of franchises. Therefore, the offer and sale of franchises is only governed by the general provisions of contract law (the Civil Code), consumer law, commercial law (the Commercial Code), competition law and unfair trade law.

In particular, the provisions of the Civil Code concerning standard terms and conditions can be applied where the fran-chisor uses standard franchise agreements being signed by the franchisee on a take-it-or-leave-it basis (section 305 Civil Code). According to section 307 Civil Code, all standard-term provi-sions need to be reasonable and may not unduly disadvantage the other party contrary to the requirements of good faith; otherwise, they are null and void.

Further, according to German consumer credit law, a fran-chisee that is not organised in the form of a company limited by shares is entitled to withdraw from the franchise contract within a period of 14 days of its conclusion if it thereby estab-lishes an independent business enterprise, the contract contains an obligation to repeatedly take supplies of goods and the total value of the franchisee’s investments does not exceed an amount of €75,000.


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format of disclosure prescribed by German law or under German franchise practice. A written standard compliance procedure does not exist. Nevertheless, it would be advisable for franchisors to expressly disclose to their potential partners in writing all information that is deemed necessary according to German case law and to the non-binding GFA guideline on pre-contractual disclosure obligations (reflecting the actual constitution of the franchise system).

An obligation for continuing disclosure can follow from the principle of good faith that is a basic principle of German law (see question 13.1). By invoking good faith, a court may establish collateral obligations owed between contracting parties. This may include protective obligations, such as information (disclo-sure) about developments having an impact on the franchisee’s business or on the franchise system in general (for example, the franchisor’s trademark being challenged by a third party).


Under German law, only the general provisions regarding pre-contractual obligations, in particular the principle of culpa in contrahendo (see question 1.5), and no special statute apply to the non-compliance with pre-sale disclosure obligations. Under the principle of culpa in contrahendo the franchisee might be enti-tled to damages, if pre-sale disclosure obligations have culpably not been complied with by the franchisor. As a general prin-ciple under German law, a party who is liable for damages must restore the damaged party’s position that would exist if the circumstance obliging the party to damages would not have occurred. Usually, the franchisee’s claim for damages will there-fore comprise, for example, an operating loss that has arisen due to the establishment of the franchise outlet. Further, the fran-chisee might claim contract adjustment and sometimes also cancellation of the whole franchise agreement. Damage claims based on non-compliance with pre-sale disclosure obligations might not only be directed against the franchisor but also against third parties (for example, directors of a franchisor that is organ-ised as a private limited company, business consultants or tax advisers), who are not themselves intended to be parties to the franchise agreement but who have substantially influenced the pre-contractual negotiations or the entering into the contract without complying with the pre-sale disclosure obligations.


German statutory law does not provide for special require-ments that a franchisor must meet prior to offering franchises. Nevertheless, the German Franchise Association (GFA) lists numerous guiding principles in its code of ethics. Inter alia: ■ the franchisor must have successfully run a business

concept for an appropriate period of time and with at least one pilot project before founding its franchise network;

■ thefranchisormustbetheownerorlegitimateuserofthecompany name, trademark or any other special labelling of its network; and

■ thefranchisormustcarryout initial trainingofthe indi-vidual franchisee and must assure ongoing commercial and/or technical support to the franchisee during the entire term of the contract.

Observance of the stated principles is obligatory in order to become and remain a member of the GFA and to demonstrate fair business practices.

must disclose all relevant information about it in order to avoid subsequent damage claims. A non-binding guideline for fran-chisors about disclosure in Germany is the GFA’s guideline on pre-contractual disclosure obligations.

It may be derived from German case law that at least the following items should be disclosed:■ information about the franchise concept, including in

particular, date of the beginning of the franchise system and the actual number of franchisees, fluctuation rate;

■ indication of people in charge to act on behalf of thefranchisor;

■ the franchise offer, including amongst others: location,performance and experience of the pilot business, required investment and manpower for the franchisee’s business;

■ information that enables the franchisee to elaborate itsown location analysis and profitability calculation of the franchise business;

■ informationaboutsituationswherecompulsorystatutorypension insurance for the franchisee applies;

■ the franchise agreement and the franchise handbook(including all standard appendices);

■ membershipsinfranchiseassociations;■ informationonotherdistribution channels for the fran-

chise product or service;■ pending lawsuits with a potential impact on the fran-

chisee’s business; and■ indication of the initial and ongoing support by the

franchisor.The pre-contractual information should be disclosed within a

reasonable period prior to the conclusion of the franchise agree-ment. This applies also to any (preliminary) binding agreement between the parties. Conversely, the rules of pre-contractual disclosure in connection with franchise contracts shall not apply to reservation agreements between the franchisor and a poten-tial franchisee. As the term of such agreements is shorter, there are minor economic consequences and usually no obligation to enter into a franchise agreement is provided.


In case of a sub-franchising structure, it is up to the sub-franchisor to make pre-sale disclosures to sub-franchisees. As a result, the sub-franchisor must provide information about the way the franchise system works and its prospects of success.

However, as there are no statutory provisions with regard to pre-contractual disclosure obligations (see question 1.5), the scope and content of the disclosure requirements depends on the sub-franchisee’s need for information and its existing possi-bilities to obtain information. Therefore, the sub-franchisor must, at least, offer information about the master franchise and the allocation of tasks between franchisor and sub-franchisor. Moreover, the sub-franchisor must show the extent of the deri-vation of rights from the franchisor (particularly as to trade-marks and know-how).


Unlike common law countries, and contrary to the legal situa-tion in, for example, France, Italy and Spain, there is no specific


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so only the company’s assets are liable to the company’s credi-tors. Furthermore, the GmbH offers a great deal of flexibility as regards internal structures and procedures.


If the business entity is to be classified as a partnership, its formation is governed by the Civil Code and the Commercial Code. The incorporation of a private limited liability company is subject to the Limited Liability Company Act. Limited liability companies must be registered in the Commercial Register, which is maintained by the local courts.

3 Competition Law


In 2005, German antitrust law was completely harmonised with European antitrust law. All forms of competition restraints contained in distribution agreements, such as non-compete clauses, price-fixing, guaranteed exclusive areas and purchasing restrictions, are now treated in full compliance with European antitrust law. European antitrust law (article 101(1) of the Treaty on the Functioning of the European Union (TFEU)) prohibits agreements between undertakings that may affect trade between Member States and that have as their object or effect the preven-tion, restriction or distortion of competition within the common market. Exemptions are made either on an individual basis or, if applicable, under a block exemption. Vertical restraints such as those typically encountered in franchise agreements can be, to some extent, exempted under the EC Block Exemption Regulation No. 330/2010 (BER).


German law is characterised by the principle of contractual freedom that allows the parties to agree on the provisions of a contract at their discretion. Therefore, restrictions on provi-sions in franchise contracts are an exemption and mainly follow from antitrust law and the laws regarding conditions in stand-ardised contracts (in particular, section 307 Civil Code).

The laws regarding standard terms and conditions specify the principle of good faith and ban standardised provisions that unreasonably disadvantage the franchisee in a manner contrary to the requirements of good faith. Against this background, a provi-sion stipulating that the duration of the franchise agreement shall be 30 years would presumably be considered void, given that it unreasonably restricts a franchisee’s entrepreneurial freedom. On the other hand, a duration that is too short (for example, one year) could also be regarded as unreasonable, as it would be practically impossible for the franchisee to recover the costs of its invest-ment in setting up the franchise business within the agreed term.


It is often agreed in franchise agreements that the franchisee is only allowed to acquire goods from the franchisor and not from other sources, including other franchisees.


Members of the GFA must conduct a severe quality review before being admitted as a full member to the GFA.

In addition, franchisors as members of the GFA must comply with the GFA’s code of ethics, which thereby influences fran-chise relationships at least to some extent. The GFA’s code of ethics was adopted on the basis of the European Franchise Federation’s code of ethics, which the GFA as a member must comply with.


Members of the GFA must conduct a severe quality review before being admitted as a full member to the GFA.

In addition, franchisors as members of the GFA must comply with the GFA’s code of ethics, which thereby influences fran-chise relationships at least to some extent. The GFA’s code of ethics was adopted on the basis of the European Franchise Federation’s code of ethics, which the GFA as a member must comply with.


German law does not require an international franchisor to provide the franchisee with pre-contractual information or a franchise agreement drafted in the German language. Nevertheless, in order to avoid misunderstandings and future disputes, it is advisable that the franchisee is at least provided with a translation of the franchise agreement for convenience, as long as it cannot be excluded that the franchisee might have difficulties with the interpretation of the franchise agreement. Moreover, if the franchise agreement provides for the juris-diction of a German court, a translation of the agreement will become necessary if it is brought before a court, given that the language in court needs to be German (this applies to all docu-ments involved).



Under German law there is no difference between franchisors from EU and non-EU Member States.


Franchisors wishing to set up business in Germany have a variety of legal forms (partnerships and limited liability compa-nies) from which to choose. Nevertheless, the most common form of corporate vehicle to be established by a typical fran-chisor in Germany is a private limited liability company (GmbH). This corporate form requires a minimum amount of capital investment (at least €25,000) and offers limited liability,


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agreement are subject to competition law, as they restrict the franchisee’s freedom of business activities and prevent other suppliers from distributing their products or services through the franchisee involved. Under competition law, non-compete obligations are treated like purchasing obliga-tions. Consequently, they are lawful if they are essential for maintaining the identity and reputation of the franchise system or to protect the know-how transferred by the franchisor to the franchisee(EuropeanCourtofJustice,Pronuptia, see above). If a non-compete clause is not essential, the BER can still apply. According to the BER, non-compete clauses during the term of the agreement must not be agreed for more than five years.

Under competition law, post-term non-compete clauses may fall under the ban on cartels (article 101(1) TFEU) if they have an appreciable impact on competition. Those post-term non-compete clauses are generally not exempted by the BER. Nevertheless, the BER states an exemption: non-compete clauses can be agreed for one year after termination of the agree-ment if they only apply to competing products or services, are essential for the protection of know-how and are restricted to the business location of the franchisee during the term of the agreement. Moreover, after the term of the agreement the fran-chisee can be prohibited from using and disclosing know-how provided by the franchisor that has not entered the public domain. There are no time restrictions for such clauses. Please note that the franchisee may claim reasonable compensation for a post-term non-compete obligation.

Again, the exemptions of the BER are only available to fran-chisors and franchisees with a market share of less than 30 per cent. If the market share is higher, the block exemption does not apply and the clause is invalid.

Under German procedural law, in-term and post-term non-compete clauses can be enforced by way of an action for injunction (i.e. omission of a certain breach of contract) and by way of a court-ordered interim injunction (section 940 Code of Civil Procedure).

In order to obtain such an injunction, the plaintiff has to prove the risk of infringement. This can be done in two different ways: either an infringement already has been committed and can be proven, then the risk of repetition is generally assumed (unless the nature of infringement or unusual circumstances indicate otherwise). The defendant then carries the burden of proof and has to refute this assumption. Harder to prove for the plaintiff is the so-called preventive injunction. Here an infringement has not yet occurred but the claimant claims a risk of initial infringe-ment. The burden of proof lies fully with the claimant. The imminent danger of an infringement has to be demonstrated through objective facts.

Such German court-ordered injunction is enforced by levying a coercive penalty payment and, as ultima ratio, by coercive penalty detention, for example, of the managing directors of the franchisee (section 888 Code of Civil Procedure).



Apart from well-known or famous brands, trademark protection in Germany requires registration either with the German Patent and Trademark Office or as a Community trademark with the European Trademark Office (Alicante, Spain) or a designation of international trademarks for Germany. Trademarks such as words, letters, numbers, pictures, sounds, colours and colour combinations are protected by the Trademark Act.

The franchisee’s obligation to sell only the contract goods is lawful and does not violate competition law if it is essential for maintaining the identity and reputation of the franchise network (EuropeanCourtof Justice, judgmentof28 January1986,caseNo. 161/84, ECR 1986, 353, Pronuptia). If a purchase obligation is not essential for the identity and reputation of the franchise network, the BER can still apply. According to article 5 BER, purchase obligations are exempted by the BER where the dura-tion is neither indefinite nor exceeds five years. Contracts with purchase obligations that are tacitly renewable beyond a period of five years are therefore not exempted by the BER. However, if the goods or services are resold by the franchisee from the premises and land-owned by the franchisor or leased by the franchisor from third parties not connected to the franchisee, the non-compete obligation may be of the same duration as the period of occu-pancy of the point of sale by the franchisee. Please note that the BER only applies to franchise systems with a market share of less than 30 per cent. If the market share is higher than 30 per cent, the block exemption does not apply, but an individual exemption under article 101(3) TFEU might still be possible.

Apart from that, restrictions with regard to the maximum permitted term for a product supply agreement only follow from the laws regarding conditions in standardised contracts (see question 3.2).


Basically, every form of direct or indirect price-fixing is prohib-ited by German and European antitrust law. The franchisee must be free to determine at what price it wants to sell its prod-ucts or render its services. The exemptions of the BER do not apply to agreements with price-fixing clauses. The fran-chisor is only entitled to set a maximum for the prices at which the product or service of the franchise system are to be sold. Additionally, the franchisor is entitled to issue non-binding price recommendations. Fixed resale prices may also be permis-sible to organise a coordinated short-term low-price campaign in a franchise system (two to six weeks in most cases).


Under EU and German antitrust law, a franchisee cannot be provided with a completely exclusive area. Nevertheless, there is a large array of exemptions to that rule. Exclusivity can be provided in the sense that the franchisees can be forbidden to actively distribute outside their exclusive areas. Active distribution is defined as all forms of marketing where the franchisee actively approaches potential customers. In contrast, passive distribution cannot be prohibited; passive distribution being all forms of marketing where the franchisee does not actively approach potential customers, but only responds to their requests. Therefore, the franchisee cannot be forbidden from delivering goods or rendering services at the request of its customer even if this customer is located outside of the exclusive area. The establishment of an internet homepage is expressly deemed by the European Commission to be passive distribution. The franchisee cannot therefore be deprived of the right to present itself on the internet.


Obligations not to compete during the term of the franchise


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franchisor and the sub-franchisees. Sub-franchisees can therefore only claim damages against the franchisor by tort law or by product liability (for example, a defect product manufactured by the fran-chisor causes a body injury). Consequently, a sub-franchisor is solely responsible for fulfilling the disclosure obligations with regard to the sub-franchisees (see question 1.6). Nevertheless, the sub-franchisor may have a right of recourse against the franchisor if the sub-franchisor has used and relied on the franchisor’s disclo-sure material containing misleading information (breach of duties by franchisor). Because of German law on standard terms it is not possible to exclude liability for injury to life, body or health and in case of gross fault in the franchise agreement. An indemnity that the franchisor takes from the master franchisee would have to comply with German law on standard terms as well. Therefore, an indemnity would have to be reasonable and not unduly disad-vantage the master franchisee in order to be valid.


Under German law, it is not possible for a franchisor to avoid liability for pre-contractual misrepresentation by including disclaimer clauses in the franchise agreement.


Generally, German law follows the idea of individual remedy which means that every franchisee needs to bring its claim before a court. Since November 2018, the German Civil Procedure Code has introduced a completely new kind of declaratory action, the new Model Declaratory Action (‘Musterfeststellungsklage’), which serves as collective redress mechanism for consumers in mass damage cases and is directed against entrepreneurs. Under the German Civil Code, ‘consumer’ is any natural person who, when acquiring the claim or establishing the legal relationship does not act predominantly within the framework of his or her commercial or self-employed professional activity. It is estab-lished German case law that franchisees, when entering into the franchise agreement, are not to be considered as ‘consumers’. Therefore, it is unlikely that the new Model Declaratory Action would be open to franchisees.

6 Governing Law


In principle, parties are free to choose the governing law appli-cable to their contractual relationship (article 3 of Regulation (EC) No. 593/2008, ‘Rome I’). Nevertheless, according to the European provisions on conflict of laws, there are certain provisions that cannot be excluded even by a valid choice of law, for instance competition law (see article 9 Rome I), consumer protection law (see article 6 Rome I) and employment law (see article 8 Rome I). Furthermore, German law can apply where provisions of a foreign law interfere with fundamental princi-ples of the German jurisdiction (so-called ‘ordre public’, article 21 Rome I). These are, in particular, cases in which the applica-tion of such provisions would be incompatible with civil rights.


Although know-how is part of a franchisor’s intellectual prop-erty rights, the protection of know-how is not subject to specific statutes such as the Trademark Act or the Copyright Act. As a result, there is no registration requirement for licensing know-how. Even so, franchisors’ know-how is confidential information under the franchise agreement or other confidenti-ality agreements and the use of intellectual property rights and know-how is limited to the purpose of the franchise system. Breach of business confidentiality constitutes a breach of those agreements and, moreover, is punishable under the Act Against Unfair Competition.


Copyrights are protected under the Copyright Act. In case of a copyright infringement German law offers instruments from civil law, criminal law and competition law. The owner of the copyright may, amongst others, claim removal, omission or damages. Certain conduct that infringes a copyright may also be considered a criminal offence (in this case the owner of the copy-right may file a criminal complaint to the Public Prosecutor). In rare cases the infringement of a copyright may also be consid-ered an unfair business practice under the Act Against Unfair Competition.

5 Liability


If the franchisor infringes its duty regarding disclosure, the franchisee is entitled to claim damages. The franchisor has to put the franchisee in the position it would have been in if the franchisor had fulfilled its disclosure obligation. As the fran-chisee may have not agreed to the franchise agreement under full disclosure, he or she may rescind the franchise agreement. The franchisor, therefore, can be ordered to consent to the cancellation of the franchise contract, to pay all obtained fran-chise fees back to the franchisee and to reimburse the franchisee for all expenses incurred in connection with the franchise busi-ness. But income the franchisee earned from the exercise of the franchise business has to be deducted.


As sub-franchisors are usually self-employed entrepreneurs who are not allowed to act on behalf and for the account of the fran-chisor, there is no direct contractual relationship between the


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Court of Arbitration, the London Court of Arbitration (LCIA), and the International Centre for Dispute Resolution (ICDR). The parties are free to choose the arbitral rules under which the arbitral proceedings shall be conducted. In Germany, the German Institution for Arbitration (DIS) is the most important organisation for arbitration.

7 Real Estate


German law does not provide for any special franchise-related regulations concerning the real estate market or real estate law. Thus, the general rules of the Civil Code apply. Commercial leases and subleases may be freely concluded between lessor and lessee. Usually the lease is made coterminous with the franchise agreement regarding term and expiry.

Unless otherwise agreed, in case of a commercial property lease with no definite term, a notice of termination is admissible at the latest on the third working day of a calendar quarter to the end of the next calendar quarter, leading to a notice period of gener-ally six months.


It is a possibility, in order to prevent the occupation of the prem-ises by the franchisee after the franchise agreement has ended, to stipulate in the franchise agreement an obligation of the fran-chisee/tenant to agree with the landlord on a clause within the lease agreement according to which the franchisor is entitled to enter into the lease agreement upon the termination of the fran-chise agreement. In order to enforce such right in case the fran-chisee does not vacate the premises, the landlord would have to sue against the franchisee as its tenant. If the landlord – given that he usually has no self-interest in such proceedings – is not willing to sue against the franchisee, the franchisor would have to sue against the landlord in order to force him to proceed against the franchisee.


There are no restrictions on non-national entities holding any interest in real estate, or being able to sublease.

In general, under German law subleasing requires the permis-sion of the landlord. In case of commercial leases the lessee may neither be entitled to the grant of such permission nor claim damages against the landlord. But if the landlord refuses to give his or her consent, the lessee can extraordinarily terminate the lease with the statutory notice period of three months, unless the person of the sublessee constitutes cause for the refusal. Such special termination right cannot be excluded within standard terms and conditions. A general permission to sublet may be granted in advance but is limited to the permitted purpose of the lease. On the other hand, it is also possible to contractually prohibit subleasing in general, if residential space is not concerned.

In cases where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties does not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. That might be relevant for the choice of law in a sub-franchise relationship if the master franchisee has its registered office in Germany as it is unsure if the connection to the MFA or the place of arbitration alone would be considered a ‘foreign element’ within the sub-franchise relationship that would lead to the freedom of choice of law according to article 3 Rome I.


In order to enforce foreign judgments from a country that is not a member of the European Union in Germany an exequatur procedure is necessary. Pursuant to sections 328, 722, 723 Code of Civil Procedure, a final judgment issued by a foreign court will, in principle, be recognised and enforced by the courts of Germany. The judgment will be enforced if an action for judicial enforcement (‘Vollstreckungsklage’) is brought to have the judg-ment declared enforceable by a court of the Federal Republic of Germany. The judgment of enforcement (‘Vollstreckungsurteil ’) will be of the same force and effect as if a material judgment had been originally given by a German court. The courts of Germany will only examine whether the foreign judgment is legally effective and final, and whether there is an impedi-ment to recognition pursuant to section 328 of the Code of Civil Procedure (such as a lack of competence of the foreign court according to international jurisdiction), or whether there are any defences which have arisen after the date on which the foreign judgment became legally effective and final. Judgments issued by courts of European Union Member

States, which are enforceable in the Member State, in which they were issued, are enforceable in all other Member States including Germany without the need for a declaration of enforceability (article 39 Regulation (EU) No. 1215/2012).


Arbitration in Germany offers a number of advantages, such as significant flexibility (for example, number of arbitrators, place and language of the arbitration proceedings), potential cost and time efficiencies, greater confidentiality and a binding, enforce-able and non-appealable resolution of the dispute. But arbitra-tion proceedings may be more expensive than court proceed-ings, particularly if the matter in dispute is of relatively low value. In those cases, additionally, the parties may find it difficult to appoint their favoured (meaning highly specialised) arbitrators, given the relatively low arbitrators’ fees following on from the low value of the dispute.

Germany has been a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’) since 1961. Worldwide-known arbi-tration institutes are amongst others, the ICC International


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law, a termination for cause without notice requires good cause and (usually) a warning letter beforehand. That said, only major infringements of the duties of the franchise agreement consti-tute good cause in this respect, resulting in the right for termina-tion for cause even without notice. Since this right is considered as a last resort (ultima ratio), default of payment and the violation of certain contractual provisions alone do not make the contin-uation of a longstanding franchise relationship unreasonable for the franchisor (Kammergericht Berlin, judgment of 21 November 1997, file No. 5U 5398/97, Burger King). There may be circum-stances that lead to sudden friction in the relationship between the franchisor and the franchisee, for example, the refusal to pay the franchise fees or the repeated breach of important rules of the franchise system (such as the prohibition on cooperating with competitors). To assess whether an action justifies the termina-tion of the contract for good cause requires an overall evalua-tion of the circumstances of the individual case and weighing the interests of the franchisor and the franchisee. The termination declaration has to take place within a reasonable time after the occurrence of the activity that led to the friction in the relation-ship. Please note that neither the necessity nor the requirements for good cause (including the warning letter) can be waived within a pre-formulated standard franchise agreement.

Franchise agreements with an indefinite term can be termi-nated either for good cause (without notice, as specified above) or without cause. In case of termination without cause, contrac-tual or statutory periods of notice must be considered. German law provides for the following statutory notice periods depending on the duration of the contract: one month within the first year of the term; two months within the second year of the term; three months within the third to fifth year of the term; and five months after five years of the term. The parties may agree on a longer notice period as provided for by the German Commercial Code but may not shorten it. Unless otherwise agreed by the parties, any termination is valid only till the end of a calendar month.



Depending on the nature of the relationship between a fran-chisor and a franchisee, there may be a risk that the franchisee is considered as an employee or a quasi-employee of the fran-chisor, leading the franchisor to be confronted with employer obligations and employee rights of the franchisee. Whether a franchisee will be classified as an independent businessman or as an employee (or quasi-employee) depends on the scope of the control exercised by the franchisor, and on the extent of the entrepreneurial risk assumed by the franchisee.

In this respect, the courts rely on the criteria of personal dependency (employees) or economic dependency (quasi-em-ployees). Personal dependency will be assumed if the fran-chisee is excessively bound to the franchisor’s instructions regarding the subject matter, conduct, time, length and place of its activity. Self-employment on the other hand will be assumed where the franchisee is mainly free to determine its activity and bears the entrepreneurial risk. A franchisee organised in the form of a company limited by shares will not run the risk of being qualified as an employee (except for the particular case of a one-person company in which the characteristics of dependant employment prevail).


With regard to commercial leases, German law provides for less restrictions of the parties’ freedom to contract than it does for residential leases. For example, it is possible to agree on a fixed term without any reason. In general, a tenant cannot expect an initial rent free period when entering into a new lease but the parties are, of course, free to agree on an initial rent free period. A rent free period is often granted if structural alteration works have to be carried out by the tenant before opening its business. It is possible that landlords demand ‘key money’ for commercial leases (unlike for residential leases). Whether or not key money is paid is up to negotiation between the parties as well.

8 Online Trading


See question 3.5.


There are no limitations with regard to the franchisor’s ability to require local domain names from its franchisees on the termina-tion or expiry of the franchise agreement given that the parties have agreed on such transfer.

9 Termination


Irrespective of the contractual provisions, according to German law neither the necessity nor the requirements for a termination for ‘good cause’ can be waived within standard terms and condi-tions (and therefore most franchise agreements). The same applies to the necessity for a formal reminder before termina-tion without notice (see also question 9.2).


Franchise agreements can be entered into for a definite or an indefinite term. In both cases the franchise agreement can end by conclusion of an agreement to annul the franchise relationship.

A franchise agreement with a definite term can end as a result of lapse of time or by termination for cause. Under German


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Trade tax cannot, however, be deducted from the total corporate income tax amount.

Non-tax-resident business entities or entrepreneurs are subject to limited tax liability on their domestically sourced income. Income received from a permanent German establish-ment is regarded as domestically sourced income and is there-fore subject to income tax (for individuals not tax-resident in Germany) or corporate income tax (for companies not tax-resi-dent in Germany), as well as trade tax at the normal rate.

Income tax on domestic taxable income from the licensing of know-how or rights of use of non-tax-resident business entities or entrepreneurs not having a permanent establishment in Germany is levied at source by way of a withholding tax, unless otherwise provided for in an applicable double tax treaty. The withholding tax is normally paid by the debtor (the franchisee) on account of the creditor (the franchisor). The tax rate is 15 per cent. The soli-darity surcharge amounts to 5.5 per cent of the income tax or the corporate income tax.

Deliveries and services supplied in Germany against consider-ation by an entrepreneur are generally subject to German value added tax (VAT). Services relating to the licensing of rights or the provision of know-how supplied by an entrepreneur are gener-ally subject to VAT, if the recipient of these services is situated in Germany. Deliveries of goods from abroad are either subject to German VAT on the intra-Community acquisition of goods or to German import VAT. The standard rate is 19 per cent; however, some deliveries are taxed at the rate of 7 per cent and some supplies are tax-exempt (for example, financial services).

In order to mitigate the economic consequences of the Coronavirus pandemic, certain standard tax rates have been temporarily reduced until the end of 2020.





A commercial agent is entitled to an indemnity at the end of the agreement pursuant to section 89b of the Commercial Code, if the commercial agent has generated new customers for the prin-cipal’s business, or has significantly increased the extent of busi-ness with already existing customers and the principal continues to derive substantial benefits from business with said customers. This right to claim indemnity cannot be waived in advance. German law provides some exemptions, for example, if the contract is terminated for cause owing to culpable conduct of the commercial agent. As the franchisor or a replacement fran-chisee can continue to sell to the former franchisee’s customers, the franchisee may be entitled to an indemnity as well. Section 89b of the Commercial Code applies analogously in the case of termination of a franchise agreement if two conditions are met:■ the franchisee needs to be included in the franchisor’s

sales organisation to the extent that it has duties that to a considerable extent are financially comparable to those of a commercial agent; and

■ thefranchiseeneedstobecontractuallyobligedto(directlyor indirectly) transfer its customer base to the franchisor no later than at the termination of the agreement.

If the franchisee – in the case of self-employment – is consid-ered as a quasi-employee, some employment law provisions are expressly declared applicable (no general application of employ-ment law). This requires, however, the franchisee’s economic dependency on the franchisor (i.e., the franchisee’s basis of existence must arise out of the franchise business).

In order to avoid the risk of employment law being appli-cable, the franchisor has to make sure that the franchisee is not personally or economically dependent. This can be achieved by tailoring the franchise agreement respectively as well as the corresponding execution of the agreement.


As franchisees are usually self-employed entrepreneurs who are not allowed to act on behalf and for the account of the fran-chisor, there is no direct contractual relationship between the franchisor and the franchisee. Therefore, the franchisor may not be held liable for the acts or omissions of its franchisees or their employees if the franchisee is not classified as an employee (or quasi-employee) (see question 10.1).



Germany currently does not enact any exchange controls to an overseas franchisor.


A business entity that has its registered office or place of manage-ment in Germany is considered tax-resident in Germany. Unless otherwise provided for in an applicable double tax treaty, a tax-resident entity is subject to unlimited tax liability in Germany on its worldwide income. The tax system for corporate entities can be characterised as a combination of corporate income tax and trade tax.

Corporate income tax is payable at a rate of 15 per cent (plus a solidarity surcharge of 5.5 per cent of the corporate income tax, resulting in an aggregate corporate income tax rate of 15.825 per cent). Individuals who conduct business in Germany or are partners in a partnership in Germany are subject to progres-sive German income tax rates of up to 45 per cent (plus a soli-darity surcharge of 5.5 per cent of income tax), depending on their income.

Trade tax is a municipal tax, individually imposed by local authorities at the company location, and varies between approxi-mately 7 per cent and 18 per cent. The trade tax base is the taxable profit for income tax or corporate income tax purposes, modified by some add-backs and deductions. To mitigate the double burden of income tax and trade tax, income tax on business income is to a certain extent reduced by trade tax (trade tax rate relief allowance).


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The franchisors’ freedom to refuse the renewal of the fran-chise agreement may be limited under particular circumstances. From the principle of good faith derives a certain protection for investments made by the franchisee at the franchisor’s instiga-tion shortly before the termination of the franchise agreement. For example, if a franchisor has announced its intention to renew the franchise contract and thereby encouraged the fran-chisee to further investments on the verge of contract expiry, the refusal to renew the franchise contract without good reason may entitle the franchisee to claim damages.



It is possible to regulate such restrictions within the franchise contract. Normally, the transfer of the franchise is subject to the franchisor’s prior written approval in order to protect the know-how and integrity of the franchise system and to prevent entry of the franchisor’s competitors. Likewise, it is possible (and enforceable) to make the franchisee’s transfer of ownership (including assignment or pledge) in the franchisee entity subject to the prior approval of the franchisor.


A ‘step-in’ right would be subject to the German law regarding standard terms and conditions, which basically means a test whether the clause is reasonable or not (‘fairness test’). This means that the step-in right would have to drafted carefully and fair, in order to comply with German law and be enforce-able. However, a step-in right is not subject to a registration requirement.


Given that the implementation of a ‘step-in’ right/purchase option itself bears a risk of being considered an undue disadvan-tage of the franchisee (see question 16.2), such power of attorney would most likely not be valid.

Regarding this, in order to mitigate the risk of an indemnity payment, franchisors should make sure that the franchise agree-ment does not stipulate an obligation to transfer the franchisee’s customer base to the franchisor – neither directly nor indirectly.



German law stipulates that the parties to a contract effect perfor-mance according to the requirements of good faith (section 242 Civil Code). This is a basic principle of German law and a ‘general provision’, enabling a court to tailor its decision to the circum-stances of the particular case. An implementation of this basic principle of good faith is the assessment of standard terms and conditions in terms of its reasonableness pursuant to section 307 Civil Code. The principle of good faith requires that contrac-tual rights are exercised in a manner consistent with good faith. However, the decision whether a certain behaviour violates the principle of good faith depends on the facts of the individual case. Courts make restrained use of the principle of good faith and refrain from introducing new contractual terms that might be regarded as more appropriate by means of this sweeping clause.



As well as the offer and sale of franchises, the ongoing rela-tionship between franchisor and franchisee is only governed by the general provisions of the Civil Code, the Commercial Code, competition and antitrust law (see question 1.2). In practice, the laws of the Civil Code concerning standard terms play an impor-tant role for the ongoing franchise relationship; for example, regarding franchisees’ obligation to effect changes to the fran-chise system that are introduced by the franchisor during the term of the agreement.



In relation to a renewal of an existing franchise, no specific disclosure obligations apply that exceed the franchisor’s contin-uing disclosure obligations to existing franchisees as described in question 1.7.


According to German law, the renewal of a franchise contract is exclusively subject to agreement between the parties. Therefore, a franchisor may refuse to renew the franchise agreement without having to give reasons for its decision.


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proceedings it is advisable not to destroy the paper version of the franchise agreement (see question 17.1). Furthermore, scanned documents alone cannot be used for proceedings in which the claimant relies entirely on documentary evidence according to section 591 Code of Civil Procedure.



The Coronavirus pandemic currently threatens many enterprises in the franchise industry, especially those active in the food (fast food restaurants) and leisure sectors (e.g. fitness centres). The biggest threat is that, due to significantly reduced transac-tions with customers, both the franchisees and the franchisor will lose the basis for their income. However, what became visible, especially during the first months of the Coronavirus pandemic, is that franchisees and the franchisor stood together and tried to find solutions (for the stressed relationships – espe-cially with suppliers, landlords and banks), instead of focusing on the legal situation under a franchise agreement and debating about legal questions, such as to what extent franchise fees must be paid notwithstanding the economic difficulties caused by the Coronavirus pandemic. Although such behaviour, at first glance, seems to be a matter of course, it was sometimes quite rarely seen in the market. So, although not really a ‘new oppor-tunity’, the benefits of a truthful cooperation between fran-chisee and franchisor became more (and are still) visible during the Coronavirus pandemic, which might be preserved in the future.

Further, like in many other industries, the Coronavirus pandemic accelerated the initiatives in the franchise industry to further develop and intensify the use of digital distribution channels. Although it was already broadly accepted by fran-chisees with a ‘brick-and-mortar’ business that an online pres-ence by the franchisor is vital for the whole franchise system, the intensified acceptance of alternative distribution channels due to the Coronavirus pandemic could also bring new opportuni-ties to the franchise industry.



German law does not provide for a certain form requirement for franchise agreements. Hence, a franchise agreement could be concluded orally as well as by electronic signature. Form requirements might only arise from a franchisee’s right of with-drawal (pursuant to section 513 Civil Code) or a post-term non-compete obligation (pursuant to section 90a Commercial Code).

However, with regard to possible court proceedings and the question of cogency of proof, a signed ‘wet ink’ version is advis-able. According to section 416 Code of Civil Procedure, private records and documents shall – to the extent that they are signed by the parties issuing them – establish full proof that the declarations they contain have been made by the parties who prepared such records and documents. According to section 371a para. 1 Code of Civil Procedure, the rules concerning the evidentiary value of private records and documents shall be applied only to private electronic documents bearing a qualified electronic signature (as defined in article 3(12) Regulation (EU) No. 910/2014: “‘qualified electronic signature’ means an advanced electronic signature that is created by a qualified electronic signature creation device, and which is based on a qualified certificate for electronic signatures”). In case of an electronic signature that does not meet the requirements of a qualified electronic signa-ture, in this sense a franchisee could argue in court that it was not actually him who signed the franchise agreement.


For the existence of the franchise agreement, it is not neces-sary to store a paper version but with regard to possible court


90

Dr. Tom Billing is a partner at Noerr LLP. As a lawyer, he has, over the years, advised on the structure of a number of well-known national and international distribution systems and the expansion of those systems nationally and internationally. Dr. Billing has lectured on various issues of franchising and distribution law. He is the author of several published texts in relation to franchising and contract law.On a regular basis, Dr. Billing is ranked by JUVE publications as one of the lawyers frequently recommended in Germany in the field of franchising.

Noerr LLPCharlottenstraße 57Berlin, 10117Germany

Tel: +49 30 2094 2178Email: [email protected]: www.noerr.com

Franchise 2021

Germany

Noerr LLP is an international partnership with more than 500 attorneys, tax advisors, notaries, and auditors in offices in Germany (Berlin, Dresden, Dusseldorf, Frankfurt, Hamburg, Munich), in Europe (Alicante, Bratislava, Brussels, Bucharest, Budapest, London, Moscow, Prague, Warsaw) and in New York. Noerr LLP is one of Europe’s leading law firms in the field of distribution law. Noerr LLP advises in all areas of commercial law (e.g. labour law, real estate/property, product liability and corporate law). Leading experts in many legal areas and branches of industry deliver tailor-made, solution-oriented advice based on our industry know-how.

www.noerr.com


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Chapter 12 91

Italy

Rödl & Partner Gennaro Sposato

Roberto Pera

Italy

the case that the franchisor proposes to appoint only one fran-chisee/licensee. Therefore, in this case, the sole franchisee should be treated as any other franchisee operating in franchise systems that provide more than only one franchisee.


There are no registration requirements in Italy.


Pursuant to sections 4 and 6 of the Franchise Act, the franchisor must disclose to the franchisee a complete set of information, with the exception of that which is actually reserved/sensitive or whose disclosure may violate third parties’ rights, at least 30 days before the stipulation of the contract.

Different information must be disclosed by the franchisor depending on whether the franchisor operates within or exclu-sively outside Italy. A franchisor operating exclusively within Italian territory or both in Italy and abroad must provide the franchisee with a copy of the contract to be signed and the following information: i. data regarding the franchisor; ii. information concerning the trademarks used in the

network; iii. a summary description of the activities and characteristics

of the business concept of the franchise network; iv. a list of franchisees operating within the network and the

stores of the franchisor; v. an indication of the annual variation of the number of

franchisees and their relevant location within the past three years, or from the beginning of the franchise activity if it started less than three years ago; and

vi. a summary description of court or arbitration proceed-ings, or both, involving the franchise network at issue, which has been started by franchisees, third parties or public authorities against the franchisor and concluded in the past three years, in compliance with data protection provisions.

According to the Franchise Regulation, a franchisor that operates exclusively outside of Italy must provide the franchisee with the information described in i, ii and iii, along with the following: a) a list of franchisees operating within the network, and

of the stores of the franchisor sorted country by country (if requested by the franchisee, the franchisor must also



According to Act No. 129 of 6 May 2004 (the “Franchise Act”), a franchise agreement, whatever its form or description, is an agreement between two legally and financially independent parties, whereby one party grants the other party, in exchange for consideration, the right to use a set of industrial or intellec-tual property rights, related to trademarks, trade names, shop signs, utility models, industrial designs, copyright, know-how, patents, technical and commercial support and assistance, in view of having the franchisee joining a system characterised by a group of franchisees operating in the territory for the purpose of distributing specific goods and services.


The laws that regulate the offer and sale of franchises are: ■ ActNo.129of6May2004(rulesoncommercialfranchise),

which became effective on 25 May 2004 (the Franchise Act).■ MinisterialDecreeNo. 204 of 2 September 2005 (regu-

lation on commercial franchise – the “Franchise Regulation”), which applies only to franchisors who, before the date of signing the franchise agreement, have operated exclusively abroad.

■ ActNo.287of10October1990(rulesontheprotectionofcompetition and the market – the “Italian Antitrust Law”).

■ CommissionRegulation(“EC”) No. 330/2010, issued on 23 April 2010 by the EU Commission on the application of article 101/3 of the Treaty on the Functioning of the European Union to categories of vertical restraints (EU Block Exemption Regulation on vertical restraints), which is also directly applicable in Italy (the previous Regulation No. 2790/1999 expired).

■ ActNo.192of18June1998(regulationofsub-supplywithinthe production activities), in particular, article 9 on the abuse of economic dependence (the “Anti-Economic Abuse Law”).


The Franchise Act does not provide any specific regulation for


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through one or more pilot units, and must have – although the law does not expressly provide for this – a minimum duration of not less than one year, a period considered sufficient to measure, through the results of the financial statements, the economic results of the activity and therefore the replicability of the formula by third parties, with prospects of profitability.


The main Italian franchising associations in Italy are: (i) Assofranchising, whose aim is to represent the general interests of franchising in Italy and other countries; (ii) Confimprese, an asso-ciation of free enterprises specialised in the sale of goods and services through the main distribution channels, namely in fran-chising and retail; and (iii) Federazione Italiana Franchising, which is the only franchising association representing both the fran-chisors and the franchisees. A membership with the national franchise association is not mandatory, but it may be useful to be part of a group within a franchise association, because it can be beneficial to be part of a group of companies that operate in the same sector, and who finalise their common efforts in the devel-opment of franchise networks, in the protection of their inter-ests towards institutions and other market players.


As a member of a national franchise association, the franchisor should pay the annual membership fee and comply with the rules imposed by the association and, in particular, by its ethical code, statute and disciplinary rules.


According to article 3 of the Franchise Regulation, the fran-chisor, upon request of the franchisee, is required to provide information concerning the contract and its annexes in the Italian language.



Natural persons who are citizens of EU Member States can enjoy the contractual capacity provided for Italian citizens and, conse-quently, set up or participate in Italian companies following the same rules as Italian citizens. The same applies to companies that are nationals of an EU Member State, who may therefore be members of an Italian company. A foreigner legally residing in Italy may participate in an Italian company unless the law or an international convention expressly requires the verification of the conditions of reciprocity. A foreigner who does not legally reside in Italy, on the other hand, may become a member/share-holder of an Italian company on the condition of reciprocity with the foreign state of which he is a national. The same prin-ciple applies to non-EU foreign companies.

supply the former with a list of at least 20 franchisees oper-ating within the network and their relevant locations);

b) an indication of the annual variation – sorted country by country – of the number of franchisees and their relevant location within the past three years, or, if it started less than three years ago, from the beginning of the franchise activity; and

c) a summary description of any court proceedings concluded with a final judgment within the three years preceding the stipulation of the contract; also, arbitral proceedings concluded with a final award within the same term as described above. Both the court and arbitration proceed-ings must concern the franchise system. In this regard, the franchisor must provide at least the following information: the parties involved; the judicial or arbitral authority; the claims; and the decision or award.


The pre-sale disclosure obligations apply to sales to sub-fran-chisees, which have the right to receive all the mandatory infor-mation and documentation provided by the Franchise Act. The master franchisee is required to make the necessary disclosures, previously provided by the franchisor to the master franchisee, which in turn is required to provide them to the sub-franchisees.


The Franchise Act sets no duty on the franchisor to update the information disclosed in the pre-contractual phase. The performance of the contract must be carried out by the parties in compliance with the principle of good faith set forth by section 1375 of the Italian Civil Code. In light of the above, in conformity with the good faith principle, the franchisor may be required by the franchisee to update the information provided in the pre-contractual phase if the update may be considered to be in the interests of the franchisee.


From a contractual point of view, violation of the disclosure obligations by the franchisor permits the franchisee to claim annulment of the agreement pursuant to section 1439 of the Italian Civil Code, together with compensation for damages, if due, as per section 8 of the Franchising Act.


The franchisor must have tested his business concept on the market before starting its franchise network. In fact, consider-able importance for the franchisee who intends to evaluate the validity of the commercial formula proposed to him is given to the verification of the testing of the same formula by the franchisor, before the launch of the franchise network on the market. It is legally required that the acquiring company must have previously tested its own formula. The testing takes place


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The Franchise Act does not provide for a maximum permitted term for a franchise agreement. In particular, the fran-chise agreement can either be an open term or limited term. Generally, the parties enter into a limited term agreement. It must be noted that according to article 3.3 of the Franchise Act, if the agreement is for a limited term, the franchisor shall guar-antee the franchisee a minimum term related to the period of amortisation of the franchisee’s investments; this term shall not be less than three years, except for cases of earlier termination for breach of contract by one of the parties.


No, there is not a maximum permitted term.


Resale price maintenance (“RPM”) is considered, by the EU Vertical Restraints Regulation and the Italian Antitrust Law, to be illegal. Article 4.1(a) nevertheless includes an exception for fixing a maximum price level, or recommending a certain price for products or services, provided that “they do not amount to a fixed or a minimum sale price as a result of pressure from, or incentives offered by, any of the parties”. Upon the release of the new version of the Commission Regulation (330/2010), the EU Commission issued additional policy guidelines on vertical restraints on 19 May 2010, and intro-duced new interpretations on RPM. As a general rule, sections 223 and 224 of the guidelines expressly confirm that RPM must be treated as a hardcore restriction. Section 225, however, gives the possibility of the companies to use RPM in particular circum-stances, insofar as its use generates an increase in the efficiency levels and a positive effect on the market and on the consumer. In any case, such positive effect must be able to set-off and overcome any possible negative effect usually created by vertical agreements.


The provision of the exclusive right is not a mandatory clause according to the Franchise Act. However, even if no exclu-sive zone is agreed in favour of the franchisee, according to the Italian courts, the franchisor has in any case the obligation to set up the network in a “rational” manner and without obvious overlaps between franchisees. This is in light of the general duty of good faith in the performance of the contract.


The non-compete clause does not represent an essential element of the franchise agreement; therefore, if it is not expressly provided for in the contract, it will not operate between the parties. The non-competition agreement is governed by article 2596 of the Italian Civil Code, which provides that this may have a maximum duration of five years and must be limited in time or to a specific activity or area. However, according to the prevailing case law, article 2596 of the Civil Code does


In general, as most jurisdictions, Italian company law provides for businesses that have limited and unlimited liability. The former is clearly preferred in common commercial practice, particularly in franchise businesses, as limited liability protects shareholders from general business risks and allows a better allocation of funds. Depending on the size of the proposed business, the relationship among shareholders and the types of investments, franchisors typically choose between a company limited by shares (Società per azioni – SpA) or a limited liability company (Società a responsabilità limitata – Srl). The first entity offers more options regarding agreements among shareholders, the issue of debt notes and the allocation of assets for particular corporate purposes and stock listing while the second is charac-terised by a less restrictive legislative model that gives more flex-ibility to the partners’ decisions.


When a company has been duly incorporated and registered at the competent Chamber of Commerce, there are no further registration requirements or a pre-condition to being able to trade.

3 Competition Law


With reference to franchisees, there is no specific competition law, while the general EU provisions on such topic must be considered. In brief, the Consolidated versions of the Treaty on the European Union (“TEU”) and the Treaty on the Functioning of the European Union (“TFEU”) provide for specific rules on competition and, specifically, on vertical agreements and the restraints deriving from the execution of them. Article 101 of the TFEU expressly prohibits agreements that may affect trade between European Union (“EU”) countries and which prevent, restrict or distort competition. Among the practices prohibited and referred to under article 101 above, included, inter alia, is the fixing, either directly or indirectly, of the purchase or selling prices or any other trading conditions. Pursuant to article 101, second paragraph of the TFEU, any vertical agreement, prohib-ited under article 101, first paragraph, is considered automat-ically void. Despite the above, the agreements which create sufficient benefits to outweigh the anti-competitive effects are exempt from this prohibition under article 101, third paragraph, TFEU. With the Commission Regulation No. 2790/1999 of 22 December 1999 (L. 336/21) (hereinafter, the “Regulation”), the EU Commission issued new legislation aiming to imple-ment the abovementioned exception (article 101, third para-graph, TFEU) for vertical agreements. Therefore, the above introduced a new principle of balancing the anti-competitive effects of vertical agreements with the benefits, if any. Upon expiration of the Regulation (31 May 2012), on 23 April 2010 the EU Commission issued a new regulation, No. 330/2010 (here-inafter, the “New Regulation”). The New Regulation, as the Regulation, concerns the applicability of article 101, third para-graph, TFEU to vertical agreements.


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seek for the annulment of the agreement under article 1439 of the Italian Civil Code, and can sue the party for damages, if this is appropriate (article 8 of the Franchise Act).


In the case of sub-franchise, the master franchisee will be responsible for the disclosure of non-compliance or for pre-contractual misrep-resentation towards the sub-franchisees, acting in this sense as the franchisor. In any case, the franchisor’s duty of control over the master franchisee cannot be excluded. In fact, whenever the fran-chisor violates his duty of control, there could be non-contractual liability on the franchisor’s part towards the franchisee.


Franchise agreements may provide clauses aimed at excluding the franchisor’s responsibility in case of alleged misrepresenta-tion by the franchisee of the contract’s provisions. Generally, the agreement provides a clause, according to which it is stated that all the provisions of the agreement (especially those that are less favourable for the franchisee, such as the payment obli-gations) have been fully and completely understood by both parties, and are the result of a negotiation. On the other hand, such clauses cannot completely exclude a claim by the franchisee claiming the misrepresentation of one or more clauses, and if grounded, it may also be accepted by local courts.


In Italy, class actions can be promoted only by consumers or consumer associations.

6 Governing Law


There is no legal requirement for franchise agreements to be governed by Italian law, even if the parties generally choose to have the agreements governed by Italian law. There is no gener-ally accepted norm according to which Italian law is not the governing law of the franchise agreement.


Italian courts enforce orders granted by other countries’ courts

not apply to agreements between entities operating at different levels of the line (so-called vertical agreements), as is the case in franchise. Consequently, a non-compete clause included in a franchise agreement is not subject to the limits provided for by article 2596 of the Civil Code; which means that, in principle, the parties (and in principle the franchisor) are free to regulate the non-compete clause in the contract if preferred.



Franchisors can protect their trademarks in Italy by registra-tion at the Italian Trademarks and Patents Office – based in Rome – or, in case of European or international trademarks, by registering the trademarks, respectively, at the Office for Harmonization in the Internal Market – based in Alicante (Spain) – and at the World International Property Organization, which is based in Geneva (Switzerland). The regulation of trade-marks is governed by the Industrial Property Code (“IPC”), which was enacted in Italy by Legislative Decree No. 30 of 10 February 2005. When duly registered, a trademark provides the owner with exclusivity rights for 10 years from the date of the filing of the registration request. From that moment, the owner of the registered trademark has the right to its exclusive use and to prohibit its use by third parties.


Sections 98 and 99 of the IPC expressly recognise the protection of know-how and trade secrets. To be eligible for protection, know-how needs to be secret, carry economic value through its secrecy and be kept by the owner in a proper manner to maintain its secrecy. Should the know-how and trade secrets be commu-nicated to third parties or obtained in an illegal or inappropriate manner, the law has established an action for their protection. Know-how and trade secrets are usually protected by the unfair competition rules.


Copyright is protected by the local law and, in particular, by law No. 633 of 22 April 1941, for the Protection of Copyright and Neighbouring Rights (as amended up to Legislative Decree No. 154 of 26 May 1997). The mentioned law in particular offers protection to creative works of genius belonging to literature, music, the figurative arts, architecture, theatre and cinematog-raphy, whatever their manner or form of expression.

5 Liability


If one party has supplied false information, the other party may


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It is usual that the parties provide an initial rent-free period, or a facilitated rent-free period when entering into a new lease. With respect to the “key money”, the presence of points of sale in the most prestigious streets of large cities is strategic for luxury brands, and this is the reason why it is difficult to have the possibility of entering into a new lease with the landlord, because, almost always, the tenants decide to leave the store in advance of the natural expi-ration of the contract, knowing that in this way they can get the key money from the brand concerned to take over.

8 Online Trading


The EU Commission, by means of the guidelines on vertical restraints, stated that the use of the internet, for the purpose of the sale of products, must be permitted for any distrib-utor, assuming the existence of an online site is considered to be a form of passive selling, as it is a reasonable way to enable customers to reach the distributor. Therefore, this type of sale cannot be subject to restrictions. In this respect, the franchise agreement cannot impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated.


Such limitation is not provided by the Franchise Act; however, the parties are entitled to expressly provide in the agreement that the clause shall also apply after the termination of the agreement.

9 Termination


No, there are not. However, in addition to the usual termination clauses provided in a franchise agreement, the general rules on termination provided by the law apply, if not expressly derogated by the agreement for one party or for both parties.


According to article 3, section 3 of the Franchise Act, if the

for injunctions against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information.


Italy adhered to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards on 31 January 1969. According to article 839of the ItalianCivilProcedure Code, anyone wishing to enforce a foreign arbitration decision in Italy must file a formal request to the President of the Court of Appeal in whose jurisdiction the other party resides, or, if that party does not reside in Italy, the Court of Appeal of Rome shall have jurisdiction. The claimant must produce the original or a certified copy of the decision, together with the compromise act, or an equivalent document, in the original or a corrected copy. The President of the Court of Appeal, having ascertained the formal regularity of the award, shall declare by decree the effectiveness of the foreign award in the Republic, unless: (i) the dispute could not be settled under Italian law; and/or (ii) the decision contains provisions contrary to public order.

7 Real Estate


In addition to the general rules on leasing provided for in the Civil Code (article 1572) the regulation of the leasing of real estateforcommercialuseiscontainedinLawNo.392of27July1978, specifically from articles 27 to 42. The law sets clear limits on the minimum duration of the contract: it must be at least six years if the activity that the lessee will carry out is of a commer-cial nature in the strict sense; and at least nine years in specific cases where the property is used as a hotel or similar (pursuant to article 1786 of the Civil Code) or is used for the exercise of theatrical activity.


The parties may provide for the franchisor’s right to step into the franchisee/tenant’s shoes under the lease, but the right should be provided in the lease agreement. In particular, the latter should provide the right of the franchisor to be assigned with the lease agreement.


In Italy there are no restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property.


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According to article 25.4 of Presidential Decree No. 600/1973, cross-border payments of royalties are taxed by the applica-tion of a 30 per cent withholding tax (no withholding tax is due if the foreign entity has a permanent establishment in Italy). Withholding tax is applied to 100 per cent of the gross amount of the payment (on a cash basis). However, any relevant tax treaty regarding double taxation may provide for more favourable tax rates, which in such a case will prevail over the domestic taxa-tion regime described above. Moreover, qualifying payments to EU companies may be exempt under EU directives. In order to enjoy the favourable tax regimes, certain conditions must be met (i.e. the “beneficial owner” principle: the beneficial owner is the legal entity that enjoys the possession and/or benefits of ownership, such as receipt of income, of the right), and some formal documentation (i.e. a tax residency certificate issued by the foreign tax authority) shall be filed with the competent local tax authority. There is not a specific law providing that with-holding tax can be avoided by structuring payments due from the franchisee to the franchisor as management services. However, depending on the specific case, it may be evaluated if an excep-tion is possible. Finally, it should be considered that the fees recognised in the franchise agreement should be in line with the transfer pricing rules in respect of the arm’s length principle.


There are no currency restrictions regarding payments by national (local) franchisees of royalties and other payments to non-resident franchisors in their domestic currency. There are, however, certain anti-money laundering requirements that may impose specific restrictions. In principle, payments can be made only through an authorised bank or a financial interme-diary (bank wire, cheques, etc.). Cash over a certain amount (€12,500) can, in principle, be carried out of the country only if this is communicated to the competent authority (the Bank of Italy or the Financial Information Unit) and the relevant docu-mentation is obtained.



There is a risk that the franchisee might be treated as the fran-chisor’s commercial agent, even if the legal figures are different. In fact, in franchise, the franchisee assumes and bears the full business risk, whereas this risk is unknown to the agent, who only carries out his activity of promoting the products of the principal, the sale and purchase of which takes place between the principal and the client and not the agent himself. However, in order to avoid the risk of confusion of the franchise agree-ment as an agency agreement, it is advisable to provide in the agreement a clear disclaimer, according to which the agreement does not constitute an agency agreement.

franchise agreement is for a limited term, the franchisor shall guarantee the franchisee a minimum term related to the period of amortisation of the franchisee’s investments; this term shall not be less than three years, except in cases of early termination for breach of contract by one of the parties.



According to some rulings, certain labour law rules may also apply in the franchise sector when it comes to protecting the franchisee’s employees, for example, in the event of a transfer of a business. Generally, to avoid the risk that the franchisor may be qualified as a joint employer with the franchisee in respect of the franchisee’s employees, the parties must provide a specific clause according to which, in any case, the franchisor shall be considered as an employer of the franchisee’s employees.


Membership of a franchise network does not affect the normal criteria for allocating employment relationships. One of the preconditions for the existence of a franchise agreement is the reciprocal legal and economic autonomy of the parties. Therefore, the franchisor and the franchisee are companies that are autonomous from each other, each of which retains exclu-sive management power over its own personnel, and are there-fore individually responsible for the obligations and responsibil-ities with regard to the employment relationships used in their organisations. In any case, sometimes in order to avoid risk, the parties decide to specifically provide in the franchise agreement the exclusion of any responsibility of the franchisor for the acts or omissions of a franchisee’s employees in the performance of the franchisee’s franchised business.



With regard to the taxation of foreign franchise businesses and individuals, a preliminary investigation must be made based on whether the payments qualify as royalties or as services rendered within the franchise agreement, as the relevant tax treatment from an Italian perspective is different. Should the payment be deemed a royalty, all fees paid in connection with a fran-chise agreement are taxed on the non-resident franchisor in Italy for its Italian source of income. According to article 23.2(c) of Ministerial Decree No. 917/1986, remuneration deriving from the utilisation of intellectual property, trademarks, processes, formulae, and industrial and commercial information in connec-tion with know-how, are deemed as being produced in Italy if they are paid by the state, by entities resident in the state or by permanent establishments of non-resident entities.


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If the right to renewal is not provided in the franchise agree-ment, the franchisee will not be entitled to receive any compen-sation in the event that the franchisor refuses a renewal or exten-sion of its franchise agreement. Conversely, if the franchise agreement provides for renewal and the franchisor refuses to do so without a justified reason, then the franchisee may take action to obtain damages, unless the parties have already foreseen and quantified this aspect in the agreement.



Any conditions of assignment of the contract, as well as the transfer and sale or its prohibition, shall be expressly stated in the contract. The contract may in fact provide that the assign-ment is permitted, subject to the consent of the assigned party or on simple notification or prohibited contractually.


The step-in right must be expressly provided in the franchise agreement. Furthermore, it should be noted that article 1406 of the Italian Civil Code provides that each party may replace itself with a third party in the relationships deriving from a contract with corresponding services if these have not yet been performed, provided the other party allows it. Therefore, by way of example, in the case of master franchises, the agreement must contain a clause under which the sub-franchisees give their consent to step in.


The power of attorney will be valid if it meets the requirements provided by law. According to article 1392 of the Italian Civil Code, in fact, the general rule is that the proxy must comply with the formal requirements that the legal system provides for the act or acts that the representative is called upon to perform with it. It is therefore advisable to regulate in detail all the possible hypotheses and the procedure of these “step-in” rights in the franchising agreement in order to give the judge the least discre-tionary power and least possible margins of interpretation.



Apart from the provisions set forth under the Franchise Act, any other commercial provisions are left to the contracting parties, franchisor and franchisees. All parties should act in good faith while respecting the general contract and commercial laws, always balancing the interest of the franchisor in developing his uniform franchise network, with the interests of the franchisee who should be protected by the franchisor with respect to their rights as part of the network itself.



The general principles of law apply to the relationship once the franchise agreement has been entered into. For example, the principle of contractual good faith may apply once the franchise agreement has been entered into according to article 1375 of the Civil Code. Furthermore, the franchise systems must also comply with the Privacy Regulation which has recently become applicable. The text of the New Data Processing Regulation is contained in the European Privacy Regulation EU 2016/679, publishedintheOfficialJournaloftheEuropeanUnion.Thenew Directive 2018 is applicable since 25 May 2018, after which companies (including the companies belonging to a franchise system) and public administrations have the duty to comply.



If the renewal is subject to the same conditions as the expired contract, no new information must be provided already disposing the franchisee of all the information that he needs to choose whether to proceed with the renewal.


The Franchise Act does not provide that the contract is auto-matically renewed, except by common will of the parties. At the same time, it is not unclear whether the renewed contract should provide for the same conditions as the original contract. The renewal conditions must be explicitly provided in the franchise agreement. Therefore, there is no overriding right for a fran-chisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespec-tive of the wishes of the franchisor not to renew or extend.


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The real impact of the COVID-19 pandemic on the franchise sector can only be analysed from 2021 onwards. However, a distinction must be made between the business sectors in which franchise networks are active and operating. In general, the effects caused by the pandemic (and the consequent lock-down measures) have affected franchising networks crosswise, starting from the decrease in turnover, as well as on the existing contractual relationships with suppliers and lease agreements. The business sectors most affected by the lockdown meas-ures, such as the food, retail and clothing sectors, have suffered severe impact due to the pandemic while other sectors, such as real estate, have not suffered immediate relevant consequences. In this scenario one of the main tools that franchisors must operate is the elaboration of an accurate recovery plan for their franchisees. It is essential that franchisors dialogue profitably with franchisees, informing them on the measures issued from time to time by the government, of any facilitation measures (for example, state-guaranteed loans, non-repayable grants), and also continuing to ensure the supply of products or offering alterna-tive solutions. The response to the pandemic phenomenon by franchisors, franchisees, franchising associations represent a key point to effectively understand the prospects for franchising in Italy for the next years. In any case, it is essential to protect the expansion of the franchising phenomenon in Italy, which has been recording a positive trend for several years and to act with a view to creating new investment opportunities to the entire franchising business.



The Digital Administration Code, Legislative Decree No. 82 of 7 March 2005 (“CAD”), recently amended by the Legislative Decree No. 217 of 13 December 2017, provides, in article 24, the requirements of the digital signature. The digital signature must refer to a single subject and to the document or set of docu-ments to which it is affixed or associated. The digital signature integrates and replaces the affixing of seals, punches, stamps, marks and trademarks of any kind for any purpose provided for by current legislation. A qualified certificate must be used to generate the digital signature which, at the time of subscription, has not expired or has not been revoked or suspended. The franchise agreement signed with an electronic signature (in compliance with the requirements provided by law) is a binding and enforceable agreement.


If an executed franchise agreement is stored electronically, it is necessary to distinguish the case in which the contract is signed with an electronic signature (in accordance with the require-ments of the law), or if it is signed with “wet ink” and subse-quently scanned (and therefore created as a .pdf file). In the first case, the contract (signed with an electronic signature) will constitute the original document and any paper copy can be destroyed. In the second case, the .pdf document saved on the computer will be a simple copy of the contract and therefore it will be necessary to keep the signed original in ink.


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Rödl & Partner

Roberto Pera obtained his law degree from the University of Rome and spent a two-year study period with exams at the University of Hamburg and the Max Planck Institute for Comparative and International Private Law in Hamburg. He also gained an LL.M. at Columbia University of New York, a Doctorate (PhD) at the University of Rome/Macerata and attended a three-week intensive course at INSEAD (Fontainebleau) on the valuation of undertakings. Roberto has extensively counselled international clients in corporate, M&A, banking, tax and regulatory matters. He actively assisted clients in all matters involving franchise schemes in Italy in the food, real estate and sports industry sectors.

Rödl & PartnerPiazza di Santa Anastasia, 700186 RomeItaly

Tel: +39 06 9670 1270Email: [email protected] URL: www.roedl.it

Gennaro Sposato obtained his law degree from the University of Rome and gained an LL.M. at the Albert-Ludwigs-University in Freiburg (Germany). He is specialised in cross-border operations and in the assistance of international clients in Italy, especially in the franchising sector, with a special focus on food and real estate, as well as in all further matters concerning contractual and corporate law and M&A transactions. Gennaro speaks Italian and German, and is fluent in English.

Rödl & PartnerPiazza di Santa Anastasia, 700186 RomeItaly

Tel: +39 06 9670 1270Email: [email protected] URL: www.roedl.it

Rödl & Partner is active in 94 wholly owned locations in 43 countries. The integrated firm for audit, legal, management and tax consulting owes its dynamic success to 3,700 entrepreneurial-minded partners and colleagues. In close collaboration with our clients, we develop information for well-founded economic, tax, legal and IT decisions that we implement together – both nationally and internationally. The history of Rödl & Partner goes back to its foundation in 1977 in Nuremberg. Soon, further offices were opened in Germany, Central and Eastern Europe (from 1989) and the firm gained market entry to Asia (from 1995), followed by the development of important office locations in Western and Northern Europe (from 1998), in the US (from 2001), in South America (from 2005) and Africa (from 2008).Rather than create an artificial network of franchises or affiliates, we have chosen to set up international offices, and have created one global firm. We share a natural empathy with entrepreneurial, often family-owned, companies. They value a personal service and like to have advisers close at hand. So Rödl & Partner has adopted a “one face to the client” approach – a project manager works directly with our client, helping on all aspects of the matter in hand, and securing any further expertise the issue demands. It is an approach we have invested in conscientiously because we believe it is the best way to support international clients.The Rödl & Partner business philosophy is as distinctive as our approach to clients. Our clients’ problems do not fall into separate, neatly labelled

compartments. Our one-stop concept is based on a balance of expertise across a range of core professional areas, combining them seamlessly, and working in interdisciplinary teams. Rödl & Partner is not a collection of accountants, auditors, lawyers, management and tax consultants working in parallel. We work together, closely interlinked across all service lines. We think from a market perspective, from a client’s perspective, where a project team possesses all the capabilities to be successful and realise the client’s goals. Our interdisciplinary approach is not unique, nor is our global reach or our particularly strong presence among family businesses. It is the combination that cannot be found anywhere else – a firm that is devoted to comprehensively supporting international businesses, wher-ever in the world they might be.

www.roedl.it


Franchise 2021

Chapter 13100

Japan

Anderson Mōri & Tomotsune Aoi Inoue

Kenichi Sadaka

Japan


As stated in the response to question 1.2, the MSRCPA defines a “chain business” as a business that, pursuant to an agreement with uniform terms and conditions, continuously sells or acts as an agent to sell products and provide guidance regarding management. Where a franchisor is planning to appoint only onefranchiseeinJapan,undercurrentpractice,suchbusinessisnot regarded as a “chain business” and is not subject to disclo-sure obligations. This is because the relationship is not based on an agreement “with uniform terms and conditions”.




Yes. When a franchisor intends to negotiate a franchise agree-ment with a prospective franchisee, the MSRCPA obliges the franchisor to provide written documentation to the prospective franchisee describing the prescribed items and explaining the contents of the written documents.

Specifically, the franchisor must disclose information concerning the following points to the franchisee:1. the initial fee, security deposit or any other fee to be paid

when the prospective franchisee becomes a franchisee;2. the conditions of selling goods to a franchisee;3. the assistance over operation of the franchisee;4. the trade mark, trade name or any other signs to be licensed;5. the term of the contract as well as its renewal and termina-

tion; and6. other information, which is more specific, required by an

Ordinance of the Ministry of Economy, Trade and Industry (METI), including the one stated in question 3.5 below.


Whether pre-sale disclosure obligations apply to sales to sub-franchisees depends on the specific case. The relationship



Thereisnostatutorydefinitionoftheterm“franchise”inJapan.Nevertheless, there are relevant definitions with regard to fran-chise businesses.

For instance, the Guidelines Concerning the Franchise System (Franchise Guidelines) under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 1947 – Antimonopoly Act) provide as follows: “The franchise system is defined in many ways. However, the fran-

chise system is generally considered to be a form of business in which the head office provides the member with the right to use a specific trademark and trade name, and provides coordinated control, guid-ance, and support for the member’s business and its management. The head office may provide support in relation to selling commodities and providing services. In return, the member pays the head office.”


The Medium and Small Retail Commerce Promotion Act (Act No. 101 of 1973 – MSRCPA) is the main piece of legislation. It primarily targets medium and small retailers and defines a “chain business” as a business that, pursuant to an agreement with uniform terms and conditions, continuously sells or acts as an agent to sell products and provide guidance regarding manage-ment. In addition, a “specified chain business” is defined as a chain business where the agreement includes clauses permitting its members to use certain trade marks, trade names or other signs, and collects joining fees, deposits or other money from the members when they become a member. If a certain fran-chise business falls under this definition, the MSRCPA applies. Since to be a “specified chain business” requires continuously selling or acting as an agent to sell products, the MSRCPA does not apply to a chain business unrelated to the sale of products. With respect to subsequent references to the MSRCPA, the rele-vant franchise business (including the relevant sub-franchise business) is assumed to fall within the scope of a “specified chain business”, unless otherwise stated.

Additionally, from the perspective of competition law, the Franchise Guidelines regulate the offer and sale of franchises in connection with the Antimonopoly Act. The Fair Trade Commission (FTC) has overall responsibility in this regard.


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There is no clear requirement for disclosure documents to be in Japanese.However,sincethedisclosureobligationisdesignedso that prospective franchisees have sufficient information and a good understanding of the franchise, it is strongly advisable to preparedisclosuredocumentsinJapanese.



Yes. The Foreign Exchange and Foreign Trade Act (Act No. 228of1949–FEFTA)isakeypieceofJapaneselegislationthatprovides general regulations for foreign transactions, including foreigndirectinvestmentinJapan.UndertheFEFTA,certainforeign transactions involving “inward direct investment, etc.” by aforeigninvestorrequireanotificationtotheJapanesegovern-ment. There are also various specific restrictions contained in industry-specific legislation, such as the Broadcast Act (Act No. 132 of 1950) and the Banking Act (Act No. 59 of 1981).


A joint-stock company stipulated in the Companies Act (Act No. 86 of 2005) is the most typical form of business entity used by franchisors.


The simplest means for a foreign company to establish a base for businessoperationsinJapanistosetupabranchoffice.Thebranchoffice can begin business operations as soon as an office location is secured, the branch office representative is determined, and the necessary information is registered at a competent legal affairs bureau. Another way is to set up a foreign company’s subsidiary in the form of a joint-stock company, in which case the articles of incor-poration and other incorporation documents need to be prepared and registered at a competent legal affairs bureau. If the franchise operates in an industry that is regulated by industry-specific laws, it is necessary to check the relevant laws and regulations.

3 Competition Law


As stated in question 1.2, the Antimonopoly Act is relevant to the typical franchise agreement. The Franchise Guidelines and the Distribution Guidelines describe what kinds of activities or restrictions are problematic under the Antimonopoly Act.

The Franchise Guidelines require franchisors to disclose sufficient and accurate information in soliciting prospective franchisees, otherwise the franchisors’ actions can be deemed to be deceptive customer inducement, which is illegal as it falls into the category of unfair trade practices.

between the sub-franchisor and the sub-franchisee needs to be analysed; if it is considered to be a “specified chain business” under the MSRCPA, the sub-franchisor owes an obligation to disclose information relating to itself. The relationship between the franchisor and the sub-franchisor must also be analysed; if it too falls within the definition of a “specified chain business”, the franchisor is also under a disclosure obligation.


The MSRCPA imposes an initial disclosure requirement. Prior to executing the franchise agreement, the franchisor must provide written documentation to the prospective franchisee describing the prescribed items and explaining the contents of the written documents.

There are no laws or regulations regarding the frequency of updating disclosures or that impose an obligation to make continuing disclosure to existing franchisees.


As mentioned in question 5.1 below, the Minister of Economy, Trade and Industry or the relevant minister which has the authority to enforce the disclosure obligation under the MSRCPA may issue a recommendation to a franchisor who is not in compli-ance with the disclosure obligations (Paragraph 1, Article 12). If the recommendation is not followed, such minister may disclose this fact to the public (Paragraph 2, Article 12).


There are no other requirements in general, except for those provided in the MSRCPA and the Franchise Guidelines. However, if the franchise operates in an industry that is regu-lated by industry-specific laws, it is necessary to check the rele-vant laws and regulations.


TheJapaneseFranchiseAssociation( JFA)istheleadingnationalfranchiseassociation inJapan. Membershipof theJFA isnotmandatoryunderJapanese law. Whetherornot it iscommer-cially advisable to become amember of the JFA depends onthe specific case. Further information and guidance in English is available on the JFA website: http://www.jfa-fc.or.jp.e.ek.hp.transer.com/.


Yes. The JFA has implemented voluntary rules, such as theJapanFranchiseAssociationCodeofEthicsandtheVoluntaryStandard Regarding Disclosure and Explanation of Information to Prospective Franchisees. If a franchisor is a member of the JFA,thesevoluntaryrulesareanimportantconsiderationinthefranchise relationship.


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Generally, yes. Franchisors usually include these sorts of cove-nants in their franchise agreements obliging the franchisee not to operate a business that is identical or similar to the franchi-sor’s business, both during the term of the agreement and for a certain time after expiration of the term. However, these cove-nants may be deemed an excessive restraint of rights, including the franchisee’s freedom to choose its occupation and operate its business. As a result, they are not always regarded as valid or enforceable. In determining the validity of the covenant, the court considers factors such as the geographical scope of the restrictions, the terms of the covenant and the nature of the restricted business activities.



Franchisors can register trade marks with the Patent Office of Japantoprotectthemfrombeinginfringed.Evenwithoutthisregistration, the franchisors may take legal action under the Unfair Competition Prevention Act (Act No. 47 of 1993) if the trademarksinquestionarewell-knowninJapan.


If the know-how, trade secrets and other business-critical infor-mation fall within the scope of a “trade secret” under the Unfair Competition Prevention Act, they will be protected against acts that constitute unfair competition. To be deemed a “trade secret”, the information must fulfil three requirements: it must be useful; it must be unknown to the public; and it must have been controlled as a secret.

Confidentiality covenants between a franchisor and a fran-chisee are generally enforceable. If a franchisee breaches a confi-dentiality covenant, a franchisor may seek compensation for the damages caused by the violation or, in some cases, demand an injunction to prevent damages.


If materials, including an Operations Manual or proprietary soft-ware developed by the franchisor and licensed to the franchisee under the franchise agreement, contain “creativity”, these mate-rials can be protected by the Copyright Act (Act No. 48 of 1970).

5 Liability


The Minister of Economy, Trade and Industry or the relevant

If the restrictions on unfair trade practices under the Antimonopoly Act are violated, the FTC can order the breaching party to cease and desist from the activity, to delete the rele-vant clauses from the agreement and to take any other measures necessary to eliminate problematic activities (Antimonopoly Act, Article 20). Some of the categories, such as abuse of a dominant bargaining position and resale price restrictions, could be subject to surcharges (Antimonopoly Act, Articles 20-5 and 20-6).


No. There is no specific regulation.However, as mentioned in question 13.1 below, if the term

unfairly disadvantages the franchisee then it may be deemed void for being against good public policy (Civil Code, Act No. 89, 1896, Article 90).


No. There is no specific regulation.However, as mentioned in question 13.1 below, if the term

unfairly disadvantages the franchisee then it may be deemed void for being against good public policy (Civil Code, Article 90).


The Franchise Guidelines regulate transactions between fran-chisors and franchisees. According to these guidelines, it is acceptable for the franchisor to propose selling prices if it is necessary to provide a clear market position for the company or to coordinate business operations. However, when the fran-chisor supplies products to the franchisee, constraints on the selling price that apply to the franchisee could be a resale price constraint under the Antimonopoly Act. In addition, when the franchisor does not directly supply products to the franchisee, but unduly constrains the price of products or services supplied by the franchisee, this could constitute dealing on restrictive terms under the Antimonopoly Act.


Yes. The MSRCPA and the ordinance of the METI require a franchisor to disclose information about the terms and conditions of the contract concerning whether a franchisor will engage in, or allow other franchisees to engage in, busi-ness operations conducting the same or similar retail business near the franchises of a franchisee. In addition, the Franchise Guidelines provide that it is desirable for the franchisor to prop-erly disclose certain matters when inviting new franchisees to join the franchise. This avoids violating the Antimonopoly Act and enables prospective franchisees to make an informed deci-sion. Specifically, the matters are those relating to restrictions that apply to the franchisor or other franchisees of the fran-chise in setting up a similar or identical business close to the proposed business of the party contemplating joining the fran-chise, including whether there are plans to set up additional businesses and the details of the plans.



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6 Governing Law


No. Under Japanese internationalprivate law, thepartiescanusually select the governing law (the Act on General Rules for Application of Laws (Act No. 78 of 2006, Article 7)) and, there-fore, the franchise agreement is free to stipulate the law that the parties have chosen. However, in some cases, the choice of governing law can be invalidated or superseded; for example, if a public order becomes an issue.

There is no generally accepted norm relating to the choice of governing law.


Generally,ifaroguefranchiseeislocatedinJapanthenthefran-chisor can obtain a preliminary injunctive relief order from a Japanesecourtunder theCivilProvisionalRemediesAct (ActNo. 91 of 1989). However, preliminary injunctive relief orders issued by foreign courts, which are not final and binding foreign judgments,areunenforceableinJapan.


In Japan, arbitration isgenerally recognisedasaviablemeansofdisputeresolution.Furthermore,businessesinJapanusuallyprefer arbitration to litigation in connection with international contracts. This preference is primarily motivated by their interest in ensuring the enforceability of the arbitral award and maintaining their privacy/confidentiality. On20June1961,JapanaccededtotheNewYorkConvention

on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention, which took effect in Japan on 18September1961,ensurestheenforceability inJapanofforeignarbitral awards issued in other signatory countries. The Japan Commercial Arbitration Association ( JCAA)

is the most prominent arbitration institution in Japan (www.jcaa.or.jp/e/index.html). The JCAA has its own arbitrationrules( JCAACommercialArbitrationRules),thelatestamend-mentstowhichtookeffecton1January2019. Inadditiontothe JCAA,businesses often agree to arbitrate under the rulesof major leading arbitral institutions including the ICC, LCIA, AAA/ICDR, SIAC and HKIAC.

7 Real Estate


The length of term for commercial property leases (leases of

minister which has the authority to enforce the disclosure obli-gation under the MSRCPA may issue a recommendation to a franchisor who is not in compliance with the disclosure obli-gations (Paragraph 1, Article 12). If the recommendation is not followed, such minister may disclose this fact to the public (Paragraph 2, Article 12).

The MSRCPA does not provide a special remedy to franchi-sees when disclosure obligations are violated. Therefore, unless otherwise provided for in the franchise agreement, franchisees need to base any claims for damages on the general contract prin-ciples (Civil Code, Article 415) or general tort principles (Civil Code, Article 709). Franchisees can rescind the franchise agree-ment on the basis of fraudulent disclosure of information (Civil Code, Article 96). Also, if there is a material misunderstanding about the franchise agreement, the franchisee can rescind the franchise agreement (Civil Code, Article 95). Please note that anamendmenttotheJapaneseCivilCodewhichsubstantivelyrevised the provisions of the previous Civil Code took effect on 1 April 2020. The provisions cited in this Article are from the Civil Code after the amendment; however, the provisions prior to such amendment may apply to issues arising from agreements which were executed before 1 April 2020.


A franchisor or a sub-franchisor owes disclosure obligations and will be responsible for breaching them. In the case of sub-franchising, the sub-franchisor will usually be liable if there is a violation of a disclosure obligation because they are a party to the sub-franchise agreement and also the sub-franchisor directly provided the information to the sub-franchisee.

If a franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, the validity of the indem-nification is assessed on a case-by-case basis. It may be deemed void if it is against good public policy (Civil Code, Article 90).


The validity of a disclaimer clause in the franchise agreement is assessed on a case-by-case basis. A disclaimer clause between business entities is usually deemed to be valid unless it is against good public policy (Civil Code, Article 90) or the good faith principle (Civil Code, Article 1); for example, where one party breached the agreement intentionally or due to gross negligence.


The Act on Special Provisions of Civil Court Procedures for Collective Recovery of Property Damage of Consumers (Act No.96of2013),whichintroducedanewJapaneseclassactionsystem, came into effect on 1 October 2016. However, franchi-sees will not fall within the scope of the new system because it is applicable only to disputes arising from a consumer contract (i.e. a contract between a consumer and business operator) and a franchise agreement is not deemed as such.


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restrictions on sales may be problematic depending on the situation.

The Franchise Guidelines provide that if the franchise agree-ment or action by the franchisor exceeds what is necessary to properly implement and operate the franchise business and causes some unfair disadvantage to the franchisee in the light of ordinary business activities, the franchise agreement and/or action by the franchisor may constitute an abuse of a dominant bargaining position.


Generally, it is possible to require the former franchisee to transfer local domain names to the franchisor when the fran-chise agreement has expired or been terminated.

9 Termination


Usually, the franchise agreement lists the circumstances in which the franchisor may terminate a franchise relationship. In addition, the franchisor may terminate if the franchisee violates the franchise agreement (Civil Code, Articles 541 and 542).

Nevertheless, because franchise agreements are usually continuous long-term agreements, courts are likely to be more reluctant to terminate them compared to non-continuous agree-ments. The doctrine of the destruction of a mutual trust rela-tionship, which was established in the area of real estate lease agreements that are generally considered to be continuous agreements, is relevant here. With regard to lease agreements, a lessor’s ability to terminate a lease agreement is limited to circumstances where the mutual trust relationship is destroyed because of the lessee’s violation of the agreement (Supreme Court,28July1964for thehouse lease,21April1966for theland lease). This means that a lessor may not terminate a lease agreement even if the lessee is violating it, provided that the violation is not sufficient material to destroy the mutual trust relationship. In many cases, this doctrine is applied or consid-ered by the court to restrict a franchisor’s ability to terminate a franchise relationship.


Japaneselawdoesnotimposeaminimumperiodforthenoticethat must be given to bring a franchise agreement to an end due to the expiration of the contract term. The notice period stipu-lated in the franchise agreement is typically sufficient. However, if a franchise agreement has been repeatedly renewed over the course of many years, the courts tend to deem such practice to constitute a continuous agreement (as discussed in ques-tion 9.1). In that case, according to court precedent, the notice period stipulated in the franchise agreement may not be suffi-cient.IfaJapanesecourtdoesnotfindthenoticeperiodstipu-lated in the franchise agreement to be reasonable in light of the

buildings or houses) varies case-by-case, but they are usually two to five years. Moreover, under the Act on Land and Building Leases (Act No. 90 of 1991), the rights of lessees are highly protected and, in many cases, they have an option to renew the term.


Generally, it is possible for a franchisor and a franchisee to stip-ulate a clause in the franchise agreement relating to an optional/conditional lease assignment in the lease agreement between the landlordandlessee(franchisee).UnderJapaneselaw,however,transfer of the leasehold is subject to approval from the landlord (Civil Code, Article 539-2). If approval is obtained in advance, the transfer can go ahead (although the franchisor may have to solve the issue of evicting the franchisee from the premises). If the landlord does not approve, the franchisor may not, in prin-ciple, validly implement the transfer of the leasehold.


Generally, non-national entities can hold an interest in real estate and are able to sub-lease property.

Please note that the Act on Foreign Nationals’ Rights in Relation to Land (Act No. 42 of 1925) provides that an ordi-nance can be enacted which restricts acquisition by foreign individuals or foreign companies due to considerations of reci-procity and national defence. However, no such ordinance is currently enacted.


AsofJune2020,demandforcommercialofficeshasrecoveredin many cities, although it is necessary to continue to closely monitor the COVID-19 situation and its impact on the commer-cial real estate market.

Whether or not an initial rent free period is granted depends on the specific case. Usually, the lessee must pay a security deposit to the landlord and also pay some key money, which is non-refundable, to the landlord.

8 Online Trading


Japaneselawdoesnotclearlyprohibittheinclusionofthiskindof requirement in the franchise agreement. However, passive



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pursuant to the FEFTA. However, there are some reporting requirements which the franchisee must comply with, depending ontheamountofremittancefromJapantotheforeignstate.


Under the Income Tax Act (Act No. 33 of 1965), if royalties under a trade mark licence or consideration for the transfer of technology are paid to a non-resident individual or foreign entitywhichhasnoofficeinJapan,thepaymentwillbedeemedas fees; if these fees fall within the domestic withholding tax requirements, then they will be subject to withholding tax at a rate of 20%. Whether a payment is subject to a withholding tax requirement does not depend on its name or nominal term, but instead depends on whether the substance of the payment has the nature of a fee under the Income Tax Act. Additionally, if thetaxratestipulatedinataxtreatywhichJapanhassignedislowerthanthatstipulatedbydomesticJapaneselaw(i.e.20%),the treaty will apply if certain procedures are complied with.





Yes. For instance, if it is deemed that the franchisee does not buy products from the franchisor but instead the franchisor consigns the sale of the products to the franchisee, then the franchisee is not a party to the transaction with the customer (the parties will be the franchisor and the customer). Therefore, the franchisor will be directly liable as the seller against the purchaser of the product. In order to avoid this liability, the roles of the fran-chisor and franchisee should be clearly stipulated in the fran-chise agreement, and it should be made clear to the customer that the transaction with him/her is with the franchisee.



Under the Civil Code, there is a general duty to act in good faith (Article 1). In addition, if an agreement is unreasonably advan-tageous to one party, it may be deemed void for being against good public policy (Civil Code, Article 90). These clauses affect franchise relationships in various ways.

One area where the duty to act in good faith plays an important role is with regard to the franchisor’s obligation to disclose information. Courts tend to construe this as an

circumstances, the court may not permit the non-renewal of the franchiseagreement.Alternatively,aJapanesecourtmightissuea judgment finding the franchise agreement to have ended at the expiration of the contract term, but award damages to the fran-chisee in consideration of its expectations of renewal.



In a typical franchise arrangement, a franchisee’s employees are not considered to be employees of the franchisor. To mitigate the risk that they might be regarded as such, a franchisor needs to structure the franchise relationship so that the franchisee is an independent entity, and needs to clearly explain the independent nature of the franchise relationship to the franchisee. In addition, if a franchisor is involved in hiring employees for the franchisee, it should explain its position and make it clear to the prospective employees that the employer will be the franchisee, not the franchisor.


Asforvicariousliability,theCivilCodeofJapanstipulatesthat“a person who employs others for a certain business shall be liable for damages inflicted on a third party by his/her employees with respect to the execution of that business” (Paragraph 1 of Article 715). In order to be deemed “a person who employs others for a certain business”, a substantive instruction and supervision relationship is sufficient and a direct contractual relationship such as an employment agreement is not always required. For instance, there was a case where a main contractor was held to be vicariously liable for the act of the subcontrac-tor’s employee in the light of the instruction and supervision relationship between the two (Supreme Court, 12 February 1970). Therefore, whether a franchisor may be held to be vicari-ously liable for the acts or omissions of a franchisee’s employees depends on whether or not a substantive instruction and super-vision relationship between the franchisor and the franchisee’s employees exists in addition to (or in lieu of ) an instruction and supervision relationship between the franchisee and the franchi-see’s employees. This is evaluated on a case-by-case basis. To mitigate this risk, a franchisor should avoid creating a situation where a de facto substantive instruction and supervision relation-ship exists, such as the cases where the franchisor directly gives instructions to the franchisee’s employees regarding specific tasks, where the franchisor is involved in hiring the franchisee’s employees, where the franchisor virtually decides the amount of the salary of the franchisee’s employees, and so on.



No. The payment of royalties to an overseas entity was liberalised


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the franchise agreement is sometimes restricted. In these cases, if a franchisor unjustly refuses renewal, they will usually be liable and must compensate for damage suffered by the franchisee.



Yes. If stipulated in the franchise agreement, a franchisor may effectively restrict a franchisee’s ability to transfer its status or obligations under the franchise agreement. A franchise agree-ment usually requires the franchisor’s consent for the fran-chisee to transfer its franchise under the agreement. Generally, however, the franchisor cannot unreasonably refuse to give consent.


Including a “step-in” right in the franchise agreement is not clearly prohibited and there is no registration system. However, if the provision unfairly disadvantages the franchisee then it may be deemed void for being against good public policy (Civil Code, Article 90). In addition, the contractual relationships which the franchisee has had with other parties may not be transferred to the franchisor without the consent of each of the parties (Civil Code, Article 539-2). Further, the government licences, permis-sions and approvals which the franchisee has owned in rela-tion to the franchise business do not automatically go to the franchisor.


Including this sort of clause in a franchise agreement is not clearly prohibited and there is no registration system. However, from a theoretical viewpoint, there may be issues regarding the validity of this sort of clause. Further, from a practical view-point, we do not believe that this sort of clause will work effec-tively. If the franchisee delegates powers relating to completion of a franchise migration to the franchisor by including a power of attorney in the franchise agreement, Japanese lawprovidesfor a “delegation relationship” or “quasi-delegation relation-ship”. This relationship is based on mutual trust between the parties and the franchisee can terminate the delegation at its own discretion and at any time. Even if the delegation of power involves a power of attorney in favour of the franchisor, it will be difficult for the franchisor to complete the necessary proce-dures if the franchisee objects.

obligation to provide prospective franchisees with accurate and adequate information so that they can make decisions (Fukuoka HighCourt,31January2006,Shin Shin Do case, Kyoto District Court, 1 October 1991).

Courts also tend to use Article 90 to limit or invalidate liqui-dated damages clauses. In the Honke Kamadoya case (Kobe DistrictCourt, 20 July 1992), the court stated that the clauseproviding for liquidated damages of an amount equal to 60 months’ loyalty payment was significantly out of balance with the expected amount of damages. Consequently, the liquidated damages were declared void to the extent that they went beyond a reasonable amount of damages as such an amount was against good public policy.



No. The relationship should be regulated by ordinary contract law and the Antimonopoly Act, etc.



Although the MSRCPA does not clearly specify, if the term of the existing franchise agreement is just extended, the franchi-sor’s disclosure obligations under the MSRCPA do not apply at the end of the franchise agreement term. On the other hand, if the existing franchise agreement is terminated and a new agree-ment with new terms and conditions is executed, the franchi-sor’s disclosure obligations under the MSRCPA will apply prior to executing the new franchise agreement.


The franchise agreement generally states that a franchisor may refuse to renew it, or states, with the same implication, that the agreement will not be renewed unless it is mutually agreed. In some cases, the franchise agreement states that it will be auto-matically renewed unless either party notifies otherwise. The effect of the franchisor’s contractual right to refuse to renew can be denied or limited in cases where, for example, the franchisee has been heavily dependent on the franchise business and the franchisor has no or few reasonable grounds to refuse renewal. In the Hokka Hokka Tei case (Nagoya District Court, 31 August 1998), the court required compelling circumstances which make it difficult to continue the agreement for a franchisor to be able to refuse to renew a continuous agreement.


As discussed in question 15.2, the franchisor’s refusal to renew



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requirements of the Act on Special Provisions concerning Preservation Methods for Books and Documents Related to National Tax Prepared by Means of Computers (Act No. 25 of 1998 – Electronic Books Preservation Act). In that case, it is unnecessary to prepare and store the paper version of the agreement.

By contrast, if a franchise agreement is executed through handwritten signatures, it can be scanned and saved as an elec-tronic file as long as it meets the requirements of the Electronic Books Preservation Act. If those requirements are satisfied, the law does not require that the original paper version of the agreement be stored. However, it may be desirable to do so depending on the parties and the likelihood of a dispute. If a dispute arises, the original paper copy of the agreement can be produced during legal proceedings to prove the authenticity of the franchise agreement. From this perspective, caution should be exercised when determining whether to destroy the original paper version of the agreement.



Most franchise systems are facing financial impacts as a result of the COVID-19 pandemic. In particular, the franchising sectors of the restaurant industry, retail industry and travel industry are strongly affected by the spread of COVID-19. On the other hand, the COVID-19 situation may trigger opportunities for the sale and purchase of franchise businesses including acquiring the business of a distressed target franchise company.



SinceJapaneselawdoesnotstipulateanyspecificrequirementsgoverning the conclusion of a franchise agreement, it is gener-ally possible to validly enter into a franchise agreement through an electronic signature. Moreover, if an electronic signature satisfies the requirements of the Act on Electronic Signatures and Certification Business (Act No. 102 of 2000), the use of such electronic signature in any electromagnetic record creates the presumption that such record was established authentically. This presumption can make the validity and enforceability of the franchise agreement more certain. Currently, public key cryptosystems (e.g., the RSA method, ECDSA method and DSA method) have been adopted as a method to apply an electronic signature that satisfies the requirements under the said Act.


If a franchise agreement is executed through electronic signa-tures, it can be stored electronically as long as it meets the


108

Kenichi Sadaka is a partner at Anderson Mōri & Tomotsune, engaged mainly in international & domestic litigation, commercial arbitration and other alternative dispute resolution procedures. Mr. Sadaka has represented many Japanese and foreign companies in disputes among management and/or shareholders, disputes related to insurance, franchise, cross-border transactions, financial products, product liability, debt collections, termination of distributorship agree-ments, intellectual property issues, real estate transactions, construction, labour, antimonopoly issues, mortgage enforcement, defamation, administrative remedies, and other matters.In addition to these civil dispute activities, Mr. Sadaka has conducted internal investigations for several companies in relation to intra-com-pany crimes and, based upon such scrutiny, exposed criminal accusations for embezzlement, fraud, and similar white-collar crimes.Mr. Sadaka also provides day-to-day legal services for non-contentious legal affairs, such as advice on cross-border transactions (especially franchise contracts), doing businesses in Japan for foreign companies and doing businesses overseas (especially Southeast Asian coun-tries) for Japanese companies.

Anderson Mōri & TomotsuneOtemachi Park Building1-1-1 Otemachi, Chiyoda-kuTokyo 100-8136Japan

Tel: +81 3 6775 1035Email: [email protected]: www.amt-law.com

Franchise 2021

Japan

Aoi Inoue is a partner at Anderson Mōri & Tomotsune specialising in international arbitration and litigation. He represents clients in a wide range of business disputes, including sales of goods, joint venture, distributorship, licensing, franchising, complex financial products, labour & employment, product liability and construction projects. He has acted as counsel in a number of international arbitrations under various rules, including the ICC, SIAC, HKIAC, JCAA and UNCITRAL. He has been recognised as a leading arbitration lawyer in Who’s Who Legal: Japan (2018–2020, published by Law Business Research) and The Legal 500 Asia Pacific 2020.Mr. Inoue also acts for overseas clients seeking to expand their business and operations into Japan through international franchising. He has been nominated for inclusion in the list of recognised franchise lawyers of Who’s Who Legal: Japan 2013–2020.Mr. Inoue received his LL.B. from the University of Tokyo, and holds an LL.M. from Columbia Law School. He is admitted to practise in Japan and New York.

Anderson Mōri & TomotsuneOtemachi Park Building1-1-1 Otemachi, Chiyoda-kuTokyo 100-8136Japan

Tel: +81 3 6775 1122Email: [email protected]: www.amt-law.com

Anderson Mōri & Tomotsune’s franchise practice team has in-depth knowledge of the laws and regulations pertaining to franchising. Our firm provides comprehensive and tailored legal services to clients with respect to structuring and operating a franchise system, including the preparation of relevant documents such as franchise agreements and disclosure docu-ments. AMT has considerable expertise in handling franchise litigation and alternative dispute resolution proceedings. Utilising our firm’s expertise in resolving franchise disputes, we also provide strategic advice to clients in order for them to avoid future disputes in any aspect of their franchise business.Leveraging AMT’s many years of experience and expertise in international transactions, we act for overseas clients seeking to expand into Japan through international franchising. Our support includes structuring,

negotiating and drafting relevant documents such as international direct franchise agreements, international master franchise agreements and joint venture agreements. In addition, we support clients by actively providing advice on legal issues and regulations relevant to franchising in Japan.

www.amt-law.com


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Chapter 14 109

Korea

Law Firm LIN Keejeong Kim

Yong-Gap Kim

Korea

Act only when the entire franchise structure (i.e., the franchisor and at least one franchisee) is found within the territory.


Franchisors are required to register the “information disclosure statement” with the relevant local municipalities or the KFTC depending on the location of their principal place of business. The information disclosure statement is disclosed to the public, and franchisors are obligated to provide prospective franchisees with a copy of the registered statement.

The information disclosure statement includes, among others: the foundation date; affiliation or merger & acquisition of an entity which has been in the franchise business during the past three years; financial statements for the past three years; trade-marks to be used by the franchisees; other trademarks that the franchisor has been using in other franchise businesses; board members and their respective business histories for the past three years; the number of shops directly operated by the fran-chisor and by the franchisees and their average annual revenue; shops within a certain distance operated directly by the fran-chisor or by other franchisees; and material terms of the fran-chise agreement (such as payment procedures of franchise fees, costs borne by the franchisees, duration, renewal and termina-tion of the franchise agreement, and restrictions on business activities of the franchisees).


Please see the response to question 1.4 above.


Only the master franchisor is required to make the disclosure. To be exact, the Franchise Act does not have provisions directly governing sub-franchise relationships. Rather, the Franchise Act defines and has provisions on “regional franchisors” (who, in accordance with the agreement with the franchisor, solicit franchisees, maintain quality, support, train and control fran-chisees on a regional basis) and “franchise brokers” (whom the franchisor or the regional franchisor authorises to solicit fran-chisees and execute the franchise agreement with such fran-chisees). Franchisors are obligated to provide the prospective



Pursuant to the Fair Transactions in Franchise Business Act (hereinafter the “Franchise Act”), “franchise” is defined as a contractual relationship in which, during the term of the contract, (i) the franchisor allows its franchisees to use the trademarks or other indicators of the franchisor in providing goods or services in accordance with certain quality standards or business methods, (ii) the franchisor supports, trains, and controls the operations and sales of the franchisees, and (iii) the franchisees pay franchise fees to the franchisor in consideration for (i) and (ii) above.


The Franchise Act regulates the offer and sale of franchises. The Franchise Act also regulates, among others, registration and disclosure of certain information on the franchisor, items to be included in the franchise agreement, certain modes of unfair business practices, refunds of franchise fees, and restrictions on the termination of franchise agreements.


Yes. Even if a franchisor proposes to appoint one franchisee, the Franchise Act would still apply, if the annual revenue of the franchise exceeds a certain amount.

However, it is worth noting that the Korea Fair Trade Commission (the “KFTC”) (which is the government admin-istration responsible for the enforcement of the Franchise Act) has not been regulating well-known franchisors with only one franchisee in Korea. For example, Starbucks Coffee Korea, Co. directly operates every Starbucks coffee shop in Korea under the licence from Starbucks Coffee Company in the U.S. Starbucks Coffee Company has not submitted the “information disclosure statement” (see question 1.4 below) since it started the business in Korea in 1997, which would have been a violation of the Franchise Act if the KFTC regarded the business as a franchise under the Franchise Act. While there are no official statements of the KFTC, it may be assumed that the KFTC applies the Franchise


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municipalities and the KFTC would require the information disclosure statement to be in Korean, considering that the state-ment is for helping prospective franchisees understand the fran-chise business better and make an informed decision.



According to the Foreign Investment Promotion Act, non-na-tionals are generally free to make investments in Korean corpo-rations, unless the investment harms the public benefit or violates Korean laws. In accordance with the principle above, the Ministry of Trade, Industry and Energy (the “MOTIE”) announces specific types of businesses in which foreign investments are not allowed or only partially allowed. Such businesses include agriculture, live-stock farming, energy plants, transportations, broadcasting, and communications, which are often irrelevant to franchise businesses.


Corporation (“jusik hoesa” in Korean; company with limited liability) is the form most commonly used by franchisors.


No. (Please also see our response to question 2.1 above.)

3 Competition Law


Regulations under the competition laws of South Korea may be largely categorised into those relating to market dominance and those relating to unfair business practices. Regulations on fran-chise businesses tend to fall under the latter. The Monopoly Regulation and Fair Trade Act is the most basic and compre-hensive source of competition law. While the said Act applies to franchises, the Franchise Act includes regulations more specif-ically targeted to unfair practices by franchisors, and some of them override the Monopoly Regulation and Fair Trade Act.


No. However, the Standard Form Contracts Act (which would apply to most franchise agreements) provides that unfairly short or unfairly long terms or implied renewals under standard form contracts shall be null and void if they unfairly disadvantage the opposing party.


No. Please see our response to question 3.2 above.

franchisees with a copy of the information disclosure state-ment (see response to question 1.4 above) when they solicit fran-chisees through regional franchisors or franchise brokers.


The Presidential Decree of the Franchise Act stipulates the items to be included in the information disclosure statement, and the KFTC provides a standard form of the information disclosure statement.

Deadlines for updates are different depending on the kind of information to be updated. For example, the trade name and address have to be updated within 30 days from the date when the change occurred, financial statements within 120 days from the end of the fiscal year, and franchise fees payment proce-dures within 30 days from the end of the quarter during which the change occurred.

The information disclosure statement will be disclosed to the public by the relevant local municipality or the KFTC on their websites.


The KFTC can order franchisors to correct non-compliance with mandatory disclosure obligations. Failure to comply with the order may lead to criminal punishment (imprisonment up to three years, or a fine up to KRW 50,000,000).


The franchisor must provide the prospective franchisee with the proposed franchise agreement, and allow at least 14 days for the franchisee to review the terms and conditions thereof. The franchisor is not allowed to receive franchise fees or execute the franchise agreement before the 14-day period elapses.


There is no mandatory membership of any national franchise association. The Korea Franchise Association (the “KFA”) is a non-profit organisation that has franchisors as its members. The KFA offers its members training programmes, holds exhibitions, and conducts campaigns to foster the franchise business in general.


No, membership does not impose any additional obligations.


We could not find any such requirement under the Franchise Act or related regulations. However, we would assume the local


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Yes. South Korea has the Copyright Act, and is a signatory of most of the major international treaties on copyrights. The Operations Manual and software may be protected as literary works of author-ship to the extent they contain expressions with a modicum of crea-tivity. However, it should be noted that, as in many other coun-tries, such works are usually categorised as “functional works” that have more limited protection compared to other kinds of works.

5 Liability


If the information the franchisor failed to disclose is contra-dictory to the motivation the franchisee explicitly or impliedly stated for the franchise agreement, the franchisee may rescind the agreement, and may claim damages for the costs the fran-chisee spent in relation to the rescinded agreement. For possible sanctions by the KFTC and criminal charges, please see our response to question 1.8 above.


As discussed in our response to question 1.6 above, only the master franchisors are responsible for pre-contractual disclosures in rela-tion to the sub-franchisees under the Franchise Act. That said, the indemnity may be enforceable between the master franchisor (as the indemnitee) and the master franchisee (as the indemnitor), which means the master franchisor may seek damages against the master franchisee for its failure to make proper disclosures.


No, they cannot.


No, class actions are not available in South Korea in this context.

6 Governing Law



Yes. While imposing minimum resale prices is per se illegal with very few exceptions under the Monopoly Regulation and Fair Trade Act, the Franchise Act overrides and applies the “rule of reason” to resale price maintenance. Under the rule of reason, a resale price maintenance is allowed if it leads to more compe-tition between brands or brings more benefits to consumers, compared to the negative effect on competition between franchisees.


Yes. Franchisors must explicitly designate the territory of each franchisee in the franchise agreement. Also, unless there is a justifiable reason, a franchisor must refrain from, either by itself or through an affiliate, opening directly operated stores or fran-chise stores running the same kind of business in the fran-chisee’s territory.


Yes. In-term non-compete is actually provided as one of the obligations of franchisees under the Franchise Act. Post-term non-compete covenants are also enforceable to the extent reasonable. It should be noted that non-compete covenants may not be enforceable if the franchise agreement is terminated for reasons attributable to the franchisor. In-term and post-term non-solicitation of clients are also generally regarded as enforceable.



The Trademark Act protects registered trademarks. The owner of a registered trademark can prohibit others from using identical or similar marks for products/services that are identical or similar to those designated under the registration. Also, the Unfair Competition and Trade Secrets Act protects unregistered trade-marks and trade dresses that are widely known among consumers.


Yes. The Unfair Competition and Trade Secrets Act defines trade secrets as “the information on technology or business such as methods of manufacturing or sales that are not disclosed to the public and kept secret through reasonable efforts by their owner”, and prohibits espionage or misappropriation of trade secrets. Know-how and other information, to the extent they do not constitute trade secrets as defined above, may be protected by a catch-all provision that prohibits “infringing on others’ economic interests by misappropriation of others’ achievements through substantial investment and/or efforts in a manner contrary to fair commercial practices or competition norms”.


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acquisition of real estate (including the right to acquire real estate; hereinafter the same) to relevant authorities. The agree-ment to acquire real estate must be reported within 60 days from the execution of the agreement, and other types of acquisitions (e.g., inheritance, auction, enforcement of court orders, mergers & acquisitions, construction) within six months from the acqui-sition. National entities that own real estate in South Korea must also report to the relevant authority when they become a non-national. Non-national entities include entities which are more than half owned or governed by non-nationals.

Transactions in real estate that implicate military defence, or which relate to matters which are part of the cultural heritage, ecological and scenery conservation areas, or wildlife preserves, require prior approval from relevant authorities.

Further, the Foreign Currency Transactions Act provides obligations to report transfers of funds related to transactions in real estate.

Other than the above, other regulations (such as zoning laws) apply equally to nationals and non-nationals.


Having an initial rent-free period is very unusual in South Korea. However, since the COVID-19 pandemic imposed a huge impact on the commercial real estate market, there are voluntary campaigns among landlords to partially exempt tenants from paying rent, which may be supported by tax benefits from local municipalities.

The “key money” in South Korea is quite different from that in other countries, and would be the most unique feature of commercial leases in Korea. It is the premium the tenant (not the landlord) customarily demands to the new tenant for the popularity of the location. The new tenant typically expects to recoup the investment by receiving key money from the next tenant, and to possibly earn extra premium if she/he success-fully conducts business at the location.

The problem arises when the landlord decides to use the premises by herself/himself and not to lease the location anymore after the expiration of the lease agreement, which inev-itably deprives the last tenant of the opportunity to recoup the key money she/he paid to the previous tenant. This has raised a lot of controversy and agonising disputes, which eventually led to the introduction of a new provision into the Commercial Building Lease Protection Act in 2015. According to this provi-sion, during the last six months of the lease, the landlord may not disturb the tenant from receiving the key money from the prospective tenant solicited by the current tenant.

8 Online Trading


Yes, such a requirement may be validly arranged in the fran-chise agreement.

There are no specific requirements as to the governing law of franchise documents. The parties to a franchise agreement may freely choose the governing law. Normally, the law of either the franchisor’s or franchisee’s state of incorporation is chosen as a result of the negotiation between the parties.


Yes, unless such an order seriously harms Korean social norms or is in conflict with mandatory rules of Korea.


Yes, arbitration is often used as a means of dispute resolution, and South Korea is a signatory of the New York Convention. The Korean Commercial Arbitration Board (the “KCAB”) is the most popular arbitral institution. When the KCAB is not chosen, the International Chamber of Commerce, Singapore International Arbitration Centre, and Hong Kong International Arbitration Centre are the institutions domestic companies often prefer.

7 Real Estate


No, it varies case by case. However, the Commercial Building Lease Protection Act (which protects tenants and provides them with stability in relation to the lease) provides that the tenant may (i) claim the duration of the lease agreement to be one year when the duration originally agreed upon is shorter than one year, and (ii) ask for renewal by a notice to the landlord after six months and before one month before the expiration of the lease agreement, up to 10 years including the original duration, which the landlord cannot decline without justifiable reasons.


Yes, as long as there is consent from the landlord.


Although not exactly a restriction, according to the Report on Real Estate Transactions Act, non-national entities must report


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In order to mitigate the risk, franchisors should avoid being portrayed as the practical employer giving “directions” or “super-vising” the franchisees’ employees. For example, franchisors should refrain from being involved in the hiring process or time and attendance management of the franchisees’ employees.


It is possible that the franchisor could be vicariously liable, if the franchisor gives directions to and supervises the fran-chisees’ employees as employers would normally do with their own employees.

The Supreme Court repeatedly denied that a user of agency workers is their employer under the Labor Standards Act, espe-cially when there was a substantial employment relationship between those workers and the workforce agency. However, considering the underlying policies and the difference in the legal effects of being a practical employer under relevant laws, an entity giving specific directions to and supervising workers is likely to be regarded as the employer in the context of vicar-ious liability.

As to the suggestions for mitigating the risk, please see our response to question 10.1 above. In addition, it is advisable for franchisors to put indemnification clauses in the franchise agreement.



No. As long as the recipient is the entity named as the fran-chisor in the franchise agreement, there are no restrictions or reporting obligations in transferring the royalties to the over-seas franchisor.


Whether the tax withholding is mandatory is determined by the tax treaty South Korea has with the country of the franchisor. In most of the cases, royalties are subject to tax withholding, while the treaty may put a ceiling on the rate of the withholding tax. When tax authorities determine that a management services fee is practically a royalty for use of a trademark or technology, the rate for a royalty will apply.


No, the payment may be made in whatever currency the parties agree upon.


No, there are no such limitations. However, it should be noted that registrants of domain names ending with “.kr” must have a domicile in South Korea.

9 Termination


No. However, please see our response to question 9.2 below regarding notice requirements.


According to the Franchise Act, the franchisee must clearly state at least twice in writing the franchisee’s breach of the agreement and its intention to terminate the agreement unless the breach is cured, with at least two months’ prior notice. Exceptions to the above are fairly narrow, such as the franchisee’s bankruptcy, revocation of licence necessary for operating the franchise or criminal charges due to violation of franchise regulations.



Yes, there is a risk. The Agency Worker Protection Act limits the duration of the

dispatch of workers to two years and obligates the company using dispatched workers to directly hire them thereafter. While the term “dispatch” is used, the physical location of the workplace does not matter. As long as the employer of the workers (i.e., the workforce agency) and the user of the workers (i.e., who directs and supervises the workers) are separate, such workers consti-tute “dispatched workers” and the Agency Worker Protection Act would apply.

On the other hand, the Franchise Act obligates franchi-sors to educate and train the franchisee and its employees. To the extent such education and training constitutes “direction and supervision” under the Agency Worker Protection Act, the said Act will apply, and the franchisor (as the user of the dispatched workers) may be subject to hiring obligations after two years and other regulations thereunder. In addition, this may also expose the franchisee to the risk of violation of the Agency Worker Protection Act, since workforce agencies are allowed to dispatch employees for only certain kinds of duties and becoming such agency requires prior approval from the Ministry of Employment and Labor.


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In addition, in the context of fair dealing with franchisees, the Franchise Act prohibits franchisors from: compelling a fran-chisee to improve the store without a justifiable reason; unfairly restricting a franchisee’s freedom to choose business hours; and introducing a competitor, or becoming a competitor, to a fran-chisee in the territory exclusively assigned to the franchisee.

To provide one example of the standards of “unfairness” above, it is regarded unfair for the franchisor to refuse the fran-chisee’s proposal to reduce the originally agreed business hours, if the costs for keeping the store open during late night hours are not sustainable considering the revenue earned during the same hours, and the franchisee has been suffering from losses for the last three months.

However, unfairness of a transaction does not necessarily lead to the invalidity of the agreement between the franchisor and the franchisee. The Supreme Court held in 2017 that an agreement serving the purpose of implementing unfair practices under the Monopoly Regulation and Fair Trade Act may be null and void when one party earns unfair profits using its domi-nant position and the other suffers an exorbitant burden. This was the first Supreme Court decision that actually denied the enforceability of a contract for the reason above, and the same rule would apply to unfair practices.



Yes, the Franchise Act regulates various aspects of the relation-ship before and after the execution of a franchise agreement.



There are no disclosure obligations specifically timed for the renewal. Instead, as explained in our response to question 1.7 above, franchisors must register the updated information disclo-sure statement whenever the change occurs.


According to the Franchise Act, the franchisee may request renewal of the franchise agreement between 180 days and 90 days prior to the expiration, unless the franchisee has been in mate-rial violation of the franchise agreement, or in material viola-tion of the franchisor’s directions that are necessary to maintain the relationship. The franchisor may not decline to renew the agreement unless there is a “justifiable reason”, which would in most cases be materially the same as the violation of the fran-chise agreement or the franchisor’s directions mentioned above. This right of renewal is effective to the extent the total duration of the franchise agreement (including the initial term) does not exceed 10 years.

When the franchisor refuses the franchisee’s request to renew, the franchisor must notify in writing with the reason for the



Yes. Under the Civil Act, even when an entity (franchisor; “principal”) did not actually authorise another entity (fran-chisee; “agent”) to act on behalf of the principal, the principal is bound by the agent’s actions, if:(i) the principal indicated to the third party that the agent has

the authority to act on behalf of the principal; (ii) the agent acted beyond its authority given by the principal

but the third party had justifiable reason to believe the agent acted within its authority; or

(iii) the authority given to the agent expired or was revoked, and the third party believed without fault that the agent still had the authority.

Item (i) above is not likely to happen in a franchise setting, or simply can be avoided by giving accurate information to the third party as to the franchisee’s authority. Items (ii) and (iii) above assume the franchisor actually gave a certain amount of authority to the franchisee. Therefore, franchisors may avoid the risk by, if possible, giving no authority at all to act on behalf of the franchisor.

Under the Commercial Act, an entity (franchisor; “lender”) which has allowed another entity (franchisee; “borrower”) to conduct business using the lender’s trade name is subject to the obligations arising from the transaction between the borrower and the third party who effected the transaction in the belief that the lender is the party to the contract, provided that the third party is not grossly negligent in having such belief.

It should be noted that the “trade name” above is different from the trademark, although they are often identical or highly similar to each other. A trade name is the name of the entity conducting the business, and a trademark is the name used for the products/services. A business entity has only one trade name, while it may have multiple trademarks for different products/services.

Customers visiting franchisees’ stores may be the “third party” above, in which case there is nothing much the franchisor can do to mitigate the risk. In regard to other kinds of third parties, such as suppliers, landlords, and contractors of the franchisee, it is advisable for the franchisor to express in the franchise agree-ment that the franchisee must, when having transactions with a third party, always use written documents with the franchisee’s full trade name conspicuously indicated. Also, it is advisable to prohibit the franchisee from using a trade name identical or confusingly similar to the franchisor’s.



The Franchise Act provides certain types of unfair practices by franchisors, such as: unfairly ceasing or substantially limiting supply of products or services; unfairly restricting the resale price, the party to a contract, the territory, or other business activities of the franchisee; unfairly inflicting a disadvantage by abusing its dominant position; and imposing unfairly large liqui-dated damages.


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Yes, such a power of attorney would be valid. There are no required formalities for such a power of attorney.



There are no specific requirements for an electronic signature. The Electronic Signature Act provides that, when a statutory law requires signature on a document, an electronic signature that meets certain requirements would be deemed to be a valid signature under the law. However, the Electronic Signature Act does not provide that other electronic signatures are invalid. On the contrary, it expressly provides that electronic signatures in general, whether or not they meet the requirements, are valid as signatures under the agreement between the parties.

There are no formalities required to create a binding and enforceable agreement. An agreement is binding and enforce-able as long as the party seeking the enforcement can prove that such an agreement exists. Electronic signatures are recognised as a valid way of evidencing an agreement.


Documents in general are a way of evidencing certain facts. An electronic version of a document will suffice for such a purpose, unless there is a good reason to believe a forgery is involved in creating the electronic version.



Reduced sales due to social distancing and economic recession are the greatest threat to franchising. That said, there are also businesses that are emerging or expanding due to the pandemic, especially in the area of information technology and so-called platform businesses. For example, more and more restaurant franchises are jumping on the platform provided by delivery services, which makes the franchises rethink their target customers and ways to reach them.

refusal, within 15 days from the receipt of the franchisee’s request. If the franchisor fails to notify within the said period, the franchise agreement is deemed to be renewed with the same terms and conditions.

Further, if the franchisor fails to make a written notifica-tion on prospective changes in the terms and conditions or its intent not to renew the franchise agreement between 180 days and 90 days prior to the expiration, the franchise agreement will be deemed to be renewed with the same terms and conditions.


Yes, under certain conditions.Commercial agents are entitled to just compensation if the

commercial agent has brought new customers or substantial increase in business transactions, and if the principal benefits from this after the expiration of the contract with the commer-cial agent, provided that the contract is not terminated for a cause attributable to the commercial agent. The compensation above may not exceed the average remuneration for the last five years (or for the duration of the contract if it is shorter than five years).

The Supreme Court has analogously applied the same rule where (i) the reseller practically constitutes a part of the sales department of the seller, (ii) is contractually obligated to assign the relationship with customers, and (iii) needs such protection considering the totality of the facts including the investment and recoupment the reseller has made. While there are no legal precedents yet, the rule above would possibly apply to a fran-chisor-franchisee relationship.



Yes. While a franchise is seen in some countries as a prop-erty which the owner has the freedom to dispose, it is seen as a contractual relationship in South Korea. Transferring or assigning a franchise business would require consent from the franchisor.


No. Such a step-in right would have to be expressly stated in the franchise agreement. The step-in right would fall into the “the terms and conditions regarding the assignment of business” and “the effect of termination” that the Franchise Act requires to be included in the franchise agreement.


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Yong-Gap Kim is a partner leading the IP practice of the firm. After joining Kim & Chang in 1999, Mr. Kim worked in the Intellectual Property Rights Team for 19 years, providing legal advice on various matters and handling cases relating to patents, copyrights, trademark rights, unfair competition, and trade secrets. As a member of the Japan Team of Kim & Chang, Mr. Kim actively managed disputes relating to Japanese firms. Mr. Kim has also represented major international and domestic corporations in coping with various legal issues they face through collaboration with experts in diverse legal areas. In November 2017, Mr. Kim left Kim & Chang and worked at Segye Law Firm for one year. In January 2019, Mr. Kim joined Law Firm LIN, adding huge momentum to the firm’s IP practice.

Law Firm LING-Five Central Plaza Suite #20227 Seochojungang-ro 24-gilSeocho-gu, Seoul, 06601Korea

Tel: +82 2 3477 8684Email: [email protected]: law-lin.com/en

Franchise 2021

Korea

Keejeong Kim is a partner of the firm focusing on IP practice. Mr. Kim obtained his LL.M. degree in IP at the George Washington University Law School in 2014 and passed the New York State Bar Exam in the same year. After joining Yulchon, LLC in 2009, he had been practising in the area of trademarks and domain name disputes for 10 years before joining Law Firm LIN in June 2020. Mr. Kim has advised and represented foreign clients who own trademarks and who have had trouble in terminating franchise or distributorship agreements with their counterparts in Korea. Mr. Kim is experienced in dealing with cross-border issues, such as the validity and scope of the governing law provi-sions in a franchise agreement, and with interdisciplinary issues between IP and antitrust law. Mr. Kim was selected as one of the Leading Lawyers by AsiaLaw in 2017 and 2018.

Law Firm LING-Five Central Plaza Suite #20227 Seochojungang-ro 24-gilSeocho-gu, Seoul, 06601Korea

Tel: +82 2 3477 8687Email: [email protected]: law-lin.com/en

The professionals at Law Firm LIN have many years of experience at other major law firms, as officers of financial regulators, and at private equity funds and accounting firms. Based on our knowledge and experience, we have grown to become a comprehensive full-service law firm with more than 70 professionals since LIN’s inception in 2017, covering corporate law and governance, mergers & acquisitions, complex litigations, international arbitration, antitrust, joint ventures & strategic alliances, tax, intellectual property, regulatory, bankruptcy and restructuring, and employment law matters among others. Law Firm LIN has both Korean professionals as well as foreign licensed legal consultants. We are recognised for providing practical solutions to all kinds of entities doing business in Korea with a particular focus on helping international clients.

law-lin.com/en


Franchise 2021

Chapter 15 117

Netherlands

Kennedy Van der Laan Martine de Koning

Netherlands

of a franchise agreement, is governed by the Franchise Act. The Franchise Act regulates the relationship between the franchisor and franchisee and contains specific provisions on the conclu-sion of franchise agreements that apply to the pre-contractual phase (e.g. disclosure obligations and a cooling-off period) during which term the parties cannot conclude any agreement that can be deemed to be inextricably linked thereto. In addi-tion, insofar as not regulated specifically in the Franchise Act, general contract law is applicable. According to the Franchise Act, the franchise agreement must determine whether good-will exists in the franchisee’s business and, if so, the extent of that goodwill and the extent to which it is attributable to the franchisor. If, on termination of the franchise agreement, the franchisor takes over the relevant franchise company in order to continue it independently or transfer it to a third party with whom the franchisor enters into a new franchise agreement, the franchise agreement must provide how the goodwill that can reasonably be attributed is reimbursed on termination.

General Contract Law. The transfer and assignment of a franchise agreement is governed by general contract law, more specifically Section 6:159 (‘overdracht van overeenkomst ’) of the Dutch Civil Code (‘DCC’) which demands the permission of the contracting party to assign and transfer an agreement. Therefore, in principle, the franchisor needs to approve the sale and transfer of a franchise business to a new franchisee.

Act on Acquisition Fraud. The Act on Acquisition Fraud is applicable to specific situations of misinforming a prospect fran-chisee (ECLI:NL:PHR:2018:461; ECLI:NL:RBZWB:2017:8013).


Yes. The Franchise Act applies to all franchisees established in the Netherlands despite the law governing the relationship. Whether he or she is an exclusive, sole or master franchisee is not relevant for the applicability of the Franchise Act. The Franchise Act contains disclosure obligations for the pre-contractual phase and for the term of the franchise agreement.


There are no specific registration requirements for franchises in the Netherlands. All companies are obliged to register in the trade register of the Dutch Chamber of Commerce. Foreign entities that are not located in a country that is a member of



The Dutch Franchise Act (‘Franchise Act’) sets forth a legal defi-nition of ‘franchise agreement’ and ‘franchise formula’. The following definition is given to a franchise agreement: ‘an agree-ment under which the franchisor grants the franchisee the right, for a mone-tary compensation, and imposes the obligation on the franchisee to commer-cialize a franchise formula in a manner to be designated by the franchisor for the production or sale of goods or the provision of services’. The Franchise Act uses the following definition of a franchise formula: ‘an oper-ational, commercial and organizational formula for the production or sale of goods or the provision of services, which is decisive for a uniform identity and appearance of the franchise companies within the chain where this formula is used, and which comprises in any case: 1º. a trademark, model or trade name, corporate identity (house style) or drawing; and 2º. know-how, consisting of a whole of practical information not protected by any intellectual property right, arising from the experience of the franchisor and the examinations performed by him, which information is secret, essential and identified’.

In leading case law of the Dutch Supreme Court prior to the introductionof theFranchiseAct (SupremeCourt25 January2002, ECLI:NL:HR:2002:AD7329 (Paalman v. Lampenier)), fran-chise was defined as: ‘an agreement whereby one undertaking, the fran-chisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purpose of marketing specified types of goods and/or services. The agreement includes at least obligations relating to the communication by the franchisor to the franchisee of know-how’.

Depending on the context (this is only relevant for so-called distribution franchise, e.g. where there is a vertical relation-ship between the franchisor and franchisee regarding the sale of products or services), reference is sometimes made to the EU Vertical Block Exemption Regulation’s accompanying Guidelines on Vertical Restraints for a definition of the fran-chise agreement.


There are no specific laws or authorities regulating the offer and sale of franchises. The offer and sale of franchisees is thus governed by the Franchise Act, general contract law and consumer laws and competition laws.

Franchise Act. The pre-contractual phase, including the selection of a candidate franchisee and the offer and conclusion


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There are no specific statutory rules concerning sub-franchisees. Sub-franchisees are franchisees of the (master) franchisee and the Franchise Act is applicable if the definitions of the Franchise Act of ‘franchise agreements’ and ‘franchise formula’ are met and the sub-franchisee is established in the Netherlands.


Yes (see answer under question 1.5). The Franchise Act provides for a list of information that must be disclosed during the term of the franchise agreement. In addition, during the course of the franchise agreement, the franchisor must provide infor-mation on, for example, intended amendments to the fran-chise agreement, required investments, etc. The information must be provided in a way that, after consulting the informa-tion, the information remains unchanged and available at a later time. The Franchise Act also provides that parties must consult each other at least once per year. Additional rules regarding the nature, content and way of provision of information can be designated by governmental decree in the future.


The statutory pre-sale disclosure obligations in the Franchise Act are of mandatory law and cannot be avoided by a choice for a foreign law in the case of a franchise established in the Netherlands. A franchise agreement is subject to the franchisee’s right of annulment in case of non-compliance with the statutory pre-sale disclosure obligations (see answer under question 1.5).

Financial forecasts. The Franchise Act does not include an explicit obligation to provide a financial (business) forecast. If a financial forecast was provided, it has to be prepared diligently by the franchisor (see above) and flaws can create a right for the franchisee to nullify the franchise agreement if he or she would not have concluded the franchise agreement if he or she had received a diligently prepared forecast (and the franchisor may be liable for damages caused by his or her negligence). If the fran-chisor provides the franchisee with a financial prognosis that has been prepared by a third party, and the franchisor is aware that the prognosis contains serious flaws but does not notify the fran-chisee of those flaws, the franchisor may be found to have acted wrongfully and can be held liable for damages (the Paalman/Lampenier case). However, if the revenues of the franchisee turn out lower than the financial prognosis of the franchisor, this does not automatically mean that the financial prognosis was not of the required quality. Disappointing results may also derive from unexpected circumstances (i.e. flaws in the exploitation of the store by the franchisee or an economic recession). The franchisee has a duty to independently investigate the proposi-tion. Case law confirms that a prospect franchisee must have a critical attitude towards information provided by the franchisor regarding future revenues of a new franchise concept. It follows from case law that there is no duty on the franchisee to inves-tigate the correctness of the forecast in the event that the fran-chisor is a large professional party, who ensured that the prog-nosis was conducted with ‘great care’ and if the franchisor put

the European Economic Area can be subject to the Companies Formally Registered Abroad Act if they want to operate on the Dutch market. On the basis of this Act, companies have to comply with statutory and registration requirements that are applicable to Dutch companies, such as registration in the Business Register.


Franchise Act. Yes. Under the Franchise Act, the fran-chisor must provide the franchisee, at least four weeks before conclusion of the franchise agreement, with: (i) the draft fran-chise agreement including annexes; (ii) a representation on the contents and purport of the provisions on payment, surcharges or other financial contributions or regarding the investments required to be made by the franchisee; (iii) (a) information about the way in which and the frequency by which the franchisor and the franchisees will consult with each other, and, if present, the contact details of the representative body of the franchisees, (b) the extent to which and the way in which the franchisor, whether or not through a derived formula, may compete with the franchisee, and (c) the extent to which, the frequency with which and the way in which the franchisee can take note of turn-over-related information that concerns the franchisee or is rele-vant to his or her business operations; (iv) as far as it is available to the franchisor, information on his or her financial position, financial information regarding one or more company/compa-nies considered comparable by the franchisor, while the fran-chisor clearly indicates on which grounds he considers this/these comparable; and (v) all other information he knows or can reasonably suspect to be relevant for the conclusion of the fran-chise agreement. (Sections 913 and 914 of the Franchise Act.) The Franchise Act does not include an explicit obligation to provide a financial (business) forecast (see also answer under ques-tion 1.8).

The prospective franchisee must provide to the franchisor in a timely manner information about his or her financial position but only insofar as this is reasonably relevant for the conclusion of the franchise agreement.

General Contract Law and the Doctrine of Reasonableness and Fairness. General contract law places an obligation on the franchisor to provide relevant information to a franchisee. A franchisee has a duty to ask questions to obtain relevant infor-mation. The scope of these duties depends on the power and specific position and knowledge of each party. Nevertheless, the duty to inform the other party of relevant information generally outweighs the duty to investigate. The doctrine of reasonable-ness and fairness, in principle, does not place an obligation on franchisors to provide a financial forecast to a prospective fran-chisee except in special circumstances (the Paalman/Lampenier case and Albert Heijn/Albert Heijn Franchising B.V. case). The obli-gation, included in the European Code of Ethics, to provide information in the pre-contractual phase is not regarded as ‘prev-alent Dutch legal views’ pursuant to Article 3:12 DCC. It follows from lower court case law that if the franchisor does provide a profitability assessment to the franchisee, such financial assess-ment has to be diligently prepared. This means that the finan-cial assessment must be based on a careful and thorough loca-tion survey and market investigation, and must contain a clear substantiation of the figures. If the financial forecast is prepared by a third party, for example a consultancy firm, the franchisor has to timely inform the franchisee if he or she is aware of any serious flaws in the forecast.


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subject to the EU FDI Screening Regulation that establishes a framework for the screening of foreign direct investments, which shall apply from 11 October 2020. Pursuant to this regu-lation, the European Commission may, for example, issue opin-ions if an investment poses a threat to the security or public order (of more than one Member State) or if it could undermine a project or programme of EU interest.


Franchisors generally operate by way of a Dutch private company with limited liability (‘besloten vennootschap met beperkte aansprakeli-jkheid ’) in which they are protected from personal liability. A limited liability company may also be used in a joint venture structure with common ownership by the franchisor and the franchisee. Some franchisees are set up as a one-man business or other legal form.


There are no franchise-specific registration requirements. When a Dutch legal entity is set up, this new entity needs to be registered with the Dutch Commercial Register of the Chamber of Commerce. Foreign legal entities can also operate in the Netherlands by setting up a branch. In that case, the branch needs to be registered with the Dutch Commercial Register but does not have to be a separate legal entity. Lastly, a foreign capital company having legal personality (from outside the European Economic Area) operating in the Netherlands may qualify as a company formally registered abroad in case the company oper-ates (almost) entirely in the Netherlands and has no real connec-tion with its country of incorporation. This company also needs to be registered in the Netherlands.

3 Competition Law


Franchise agreements or franchises operated in the Netherlands are, regardless of the choice of law and forum, subject to Dutch competition law, and if there is an appreciable effect on trade between Member States of the EU, EU competition law. As such, franchise agreements must comply with Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) and Article 6 of the Dutch Competition Act (‘DCA’). The European Commission’s VBER and Guidelines also apply – through a clause in the DCA – to vertical agreements in the Netherlands that have no cross-border effect.


No. The principle of freedom of contract establishes that parties are free to agree on the term of the franchise agreement. Franchise agreements are often concluded for a period of five or 10 years. This may depend on lease agreements to which they are linked. Non-compete and exclusive purchasing provisions during the term of a franchise agreement are generally consid-ered to fall outside EU and Dutch competition law if they are

the franchisee under time pressure to sign the (franchise) agree-ment. If the franchisor prepares a forecast him- or herself (or a party for which the franchisor is liable pursuant to Article 6:170–172 DCC such as an employee), the franchisor is responsible for errors if the forecast was not diligently prepared (the StreetOne case). If the franchisee relies on incorrect information (regard-less of whether the franchisor knew it was flawed), and proves that he or she would not have entered into the agreement without that information, he or she may nullify the agreement afterwards. Consequently, the franchisee must be placed in a position as if the agreement had not been concluded (Article 6:228 DCC).


See answer under question 1.2. There are no franchise-specific stat-utory requirements for the offer and sale of franchises in the Netherlands. However, the Franchise Act stipulates that, in a fran-chise agreement, provision must be made for the way in which the compensation for accrued goodwill must be determined (insofar as this can reasonably be attributed to the franchisee and there-fore not goodwill arising from the franchise concept itself) upon termination. According to the Explanatory Memorandum, this is aimed at addressing the situation where the franchise agreement contains a favourable purchase option for the franchisor, e.g. the opportunity to buy the franchise unit below its market value.


Membership of the Netherlands Franchise Association (‘NFV’) is not mandatory but it is advisable for franchisors to join. The NFV acts as the branch organisation for franchise in the Netherlands and holds itself (among others) responsible for the healthy and balanced development of franchising in the Netherlands. The NFV has more than 200 members and is affiliated with the European Franchise Federation and the World Franchise Council.


Franchisors who are members of the NFV have to comply with the European Franchise Federation’s European Code of Ethics for Franchising.


Dutch law does not require translations into a local language of a contracting party, but it is important that the contracting party understands what he or she signs and is bound to. It can there-fore be advisable to submit non-binding translations.



Foreign investors looking to invest in the Netherlands may be


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another franchisee. This can be regarded as a breach of contract and/or against reasonableness and fairness; internet sales are in principle considered ‘passive sales’ in this context (see also answer under question 3.4).


Competition law. Non-compete provisions during the term of a franchise agreement are generally considered to fall outside EU and Dutch competition law if they are necessary to protect the know-how and goodwill of the franchisor that is licensed to the franchisee, and to maintain the common identity and repu-tation of the franchised network (the Pronuptia case). These in-term non-compete covenants are therefore generally enforce-able. Franchisees often try to escape from non-compete obli-gations by arguing that the provision constitutes a restriction on competition and is therefore null and void. Dutch courts, however, appear to have adopted a reticent approach. In the ANVR cs v. IATA-NL case, the Supreme Court ruled that the burden of proof is on the claimant and is high, it requires that the economic context is shown. Civil franchise cases such as Yarden franchise v. X1 and Top 1 Toys v. Vedes show that it is essen-tial that a plaintiff invoking competition law supports his or her arguments with a thorough market definition of the relevant product and geographic market and an in-depth analysis of the market shares of the parties to fulfil the burden of proof, other-wise he or she will not succeed with the claims. See also the VBER and the accompanying Guidelines on Vertical Restraints.

Franchise Act. The post-term non-compete provision is only valid if (i) it does not exceed a term of one year, and (ii) the geographical scope does not exceed the territory within which the franchisee could commercialise the franchise formula under the franchise agreement.

Principle of reasonableness and fairness. A franchisee can also argue that a non-compete provision is unenforce-able because the effect of the provision is unacceptable on the basis of the principle of reasonableness and fairness. Relevant circumstances in relation to the enforceability of a post-term non-compete provision (or limitation of the duration thereof) are the duration of the franchise relationship, the territorial scope of the non-compete provision and the specific situation (knowl-edge, transfer of know-how, background and bargaining power) of the franchisee. The consequences of the non-compete provi-sion for the franchisee may be taken into account when assessing the enforceability. The mere fact that the franchisee will not be able to generate revenues for some time is not sufficient to render the provision unenforceable. Moreover, if the franchisee has chosen to terminate the franchise agreement, he or she is less likely to be protected against a contractual non-compete provision than in a case where the franchise agreement has been terminated by the franchisor, or the termination has been caused by the franchisor’s behaviour. In general, and particularly if the clause does not violate competition law (for example, if the clause is block-exempted) and, in future, meets the Franchise Act and the franchisor has a legitimate interest in demanding to enforce the clause, non-compete provisions are generally enforceable.



Trademarks have to be registered to receive trademark protection.

necessary to protect the know-how and goodwill of the fran-chisor that is licensed to the franchisee, and to maintain the common identity and reputation of the franchised network (the Pronuptia case). If these requirements are not met, the VBER provides for an exemption of the applicability of Article 101 TFEU, but only for agreements that do not exceed five years in duration and are not tacitly renewable. Post-termination non-compete clauses are only block-exempted if their duration does not exceed one year and the location is limited to the prem-ises of the franchise operated by the franchisee. Moreover, the Franchise Act states that a non-compete clause is only permis-sible if this is recorded in writing, essential for the protection of transferred know-how of the franchiser formula, is limited to one year after the termination of the franchise agreement and, lastly, if the geographical scope of the area is not broader than the area within which the franchisee has operated its franchise business in relation to the franchise agreement.


No, but competition law may restrict the duration of certain exclusivity, non-compete and other competition-sensitive clauses (see answer under question 3.2).


Yes. Vertical price maintenance is a restriction by object and prohibited and subject to fines (Article 101 TFEU and Article 4 VBER). It is considered a hard core restriction (Article 4 VBER) and franchise agreements including such restrictions, as a conse-quence, lose the benefit of the VBER. It is very difficult to show that vertical price maintenance is nonetheless meeting the require-ments of an individual exemption, and generally such restrictions are null and void. Recommended retail prices and maximum retail prices are permitted as long as they do not constitute in reality a fixed or minimum price. Indirect forms of price maintenance or supportive measures taken by the franchisor, such as fixing a price margin for the franchisee or granting rebates for following the recommended retail price (or threatening with termination or other punishment if the franchisee does not follow the recom-mended retail price) also qualify as impermissible conduct and create a risk of – among other things – fines (see Guidelines on Vertical Restraints) and private enforcement actions. Please note that direct or indirect restrictions on internet sales by franchisees (ECJPierre Fabre, see also VBER and Guidelines) are also restric-tions by object and impermissible (with the exception of third-partyinternetplatformrestrictions,seeECJCoty).


It is not permitted under EU and Dutch competition law to provide an exclusive area into which the franchisee may sell the contracted services and goods unless restrictions only concern active sales to an exclusive customer group or into an exclusive territory. Passive sales (responding to unsolicited requests from individual customers) outside a franchisee’s allocated exclusive territory cannot be prohibited by the franchisor. For obvious reasons, under civil law, a franchisor must be careful not to license a new franchise to operate a franchise unit in the territory, radius or customer group that he already exclusively allocated to



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information and places a general obligation on both parties to inform each other in a timely manner of everything that is or could reasonably be in the interest of the other party. Based on the general rules of error, a franchisee can annul a fran-chise agreement if it was in error about relevant circumstances on the basis of a statement or information provided (or omis-sion to provide the same) by the franchisor, and if it would not have concluded the agreement without that information. If the franchisor, for instance, provides the franchisee with a finan-cial prognosis and is aware that the prognosis contains serious flaws but does not notify the franchisee of those flaws, the fran-chisor may be found to have acted wrongfully and be held liable for damages. The time limit for the annulment of the franchise agreement is three years (Section 3:52 DCC).


See answer under question 5.1. It follows from the principle of freedom of contract that a franchisor and franchisee can sue each other for damages caused by the other party. It is possible to limit such liability or to include indemnifications for third-party claims. Normally, such limitations of liability hold (unless the outcome is against reasonableness and fairness, which, for example, occurs in the case of wilful intent or gross negli-gence of the debtor or of the persons that are charged with the management of that company).


Parties can include such disclaimer clauses in a franchise agree-ment under the principle of freedom of contract, but whether or not parties can successfully avoid liability would depend on the circumstances of the case. Generally, disclaimers in a fran-chise agreement do not provide sufficient protection given the adoption of the Franchise Act (if the statutory obligations are not complied with for example) and also in light of how case law has developed. Pre-contractual misinterpretation can lead to error, which provides a legal basis for the annulment of the franchise agreement. Further, under the Act on Acquisition Fraud, which regulates misleading omission and advertising (Section 6:194 and 6:195 DCC), a franchisee can seek remedy for such pre-contractual misinterpretation by stating that it is an unlawful act in the sense of the provisions on misleading omis-sion and advertising (see answer under question 1.2). Whether or not certain omissions or acts are misleading, depend on several factors, such as the nature, composition, number, and capacity of the information provided, but also the (time of) provenance, used calculation methods and the purpose of the provision of the information. (See answer under question 5.3.) While the general starting point in Dutch civil law is that the burden of proof lies with the party making the claim, invoking Section 6:195 DCC reverses the burden of proof to the party omitting or adver-tising, i.e. places the burden on the franchisor to proof that the information provided was accurate and complete.

In light of the above, it is advisable to provide clear infor-mation as to the factual basis for information provided to the

In the Netherlands, there are no Dutch national trademarks, but one can apply, through the Benelux Office for IP (‘BOIP’), for registration of a Benelux trademark, which is protected under the Benelux Treaty for Intellectual Property. If a trademark is registered in the Benelux trademark register, the registrant has exclusive trademark rights in the Netherlands, Luxembourg and Belgium. Moreover, a trademark can be registered as an EU trademark in the register of EUIPO. If the franchisor decides to do so, he or she has the exclusive right to the trademark in the European Union. Both Benelux and EU trademarks can also be applied for by means of an International Registration as offered by the World International Property Organization (‘WIPO’).

A trade name does not have to be registered to be protected under the Dutch Trade Names Act; protection is granted to a trade name that is actually used. It is prohibited to use a trade name that is (nearly) identical to an older trade name, if this use can lead to a risk of confusion among the public. The greater the extent to which companies conduct different types of business or conduct business at different geographical locations, the less likely the risk that confusion will be established.


Yes. Unauthorised use or disclosure of confidential information can be opposed under Dutch and EU law (Dutch Trade Secrets Act and Trade Secrets Directive). A confidentiality clause is not enforceable if the scope of confidential information is not clear or too broad.


Formal registration for copyright is not required and not possible in the Netherlands. Copyright protection is granted automati-cally to works that meet the criteria for protection under Dutch copyright law – the work is of a personal character and bears the personal imprint of the author – as the Netherlands is party to the Berne Convention for the Protection of Literary and Artistic Works. A franchise formula can qualify as a work within the meaning of the Dutch Copyright Act if it meets the aforemen-tioned criteria in Article 10 of the Dutch Copyright Act. Any unauthorised publication or reproduction of the copyrighted work is an infringement unless a limitation of copyright (such as personal use) is applicable.

The imitation of a copyright-protected franchise formula does not automatically mean that the similar formula infringes the imitated franchisor’s copyright. To determine whether there is an infringement, a judge will take into account the individual original elements of the copyrighted formula and assess whether or not the imitative formula is the same overall.

5 Liability


See answer under question 1.8. The Franchise Act is of manda-tory law and includes rules for the pre-contractual exchange of


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commercial matters within and outside of the European Union. For countries that are not contracting states to the Hague Conference, the enforcement of judgments of foreign courts would depend on what is regulated in other bilateral execution treaties.


Arbitration is recognised under Dutch law as a form of dispute resolution (see Article 1020 Dutch Code of Civil Procedure). The Netherlands is party to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The NFV, together with the Netherlands Arbitration Institute, has established a list of ‘franchise arbitra-tors’ from which parties can select an arbitrator to settle a fran-chise dispute (www.nfv.nl/geschillen/). In particular, arbitra-tion can be a good option for disputes involving international franchise contracts where one of the parties resides in a country that is not bound to international treaties on the execution of foreign judgments, cases where specialised background knowl-edge is required to understand the legal framework, and cases where confidentiality is key. Arbitration is relatively expensive compared to the Dutch court system.

7 Real Estate


In principle, leases for commercial properties (including stores, restaurants, hotels, cafés, take-away services) are entered into for a minimum first term of five years. At the end of this term, the lease will be extended by another five years and then extended for an indefinite period, unless parties agree other-wise. Although parties can agree to alter the duration of (the extension of) the lease agreement, the first period must be five years or more and both terms must be at least 10 years. Parties may give notice of termination before the end of each term or at any time during the indefinite period. The notice of termina-tion must comply with mandatory law, which includes a period of notice of one year or longer, and a limited number of grounds for the lessor for giving notice of termination.

An exception to the above are lease agreements with a dura-tion of less than two years, in which case the contract will end by operation of law, unless parties agree otherwise. If parties extend/continue the lease after the period of two years, the stat-utory duration (two times five years) and mandatory grounds for giving notice of termination will apply to these leases as well by operation of law.


A provision in the lease agreement that stipulates a right for the

franchisee, to include disclaimers, and in any case not to provide financial forecasts (such as specific numbers), unless these were the result of diligent and thorough research and investigation into the local situation.


The Act on collective damages in class actions (‘WAMCA’) enables franchisees to claim damages for or on behalf of a ‘class’ in case of a tort or breach of contract. However, it follows from the principle of freedom of contract that class action waiver clauses can exist in a franchise agreement. Under the WAMCA, foundations or associations with full legal capacity can institute a claim intended to protect similar interests of other persons to the extent that its articles promote such interests (Article 3:305a DCC). The proceedings are different from class actions that are known in the USA.

6 Governing Law


No. Parties are free to decide to submit the franchise relation-ship to Dutch or any other foreign law. This follows from the principle of freedom of contract. However, if the franchisee is established in the Netherlands, the Franchise Act is applicable regardless of the choice of law. If the franchise agreement is subject to Dutch law, and the franchisee is established outside the Netherlands, the applicability of the Franchise Act can be excluded.


Yes. The EU Trade Secrets Directive and Dutch Trade Secrets Act provide specific enforcement measures. In urgent matters, Dutch courts can take interim measures in preliminary relief proceedings, such as the prohibition of the use and disclosure of trade secrets, the prohibition of the production of infringing goods, offering, placing on the market or use of infringing goods, or the importation, export or storage of infringing goods for those purposes. The Trade Secrets Act also includes the right of trade secret holders to claim attachment and destruction of items containing or applying trade secrets, such as substances, documents and electronic files.

Preliminary relief can also entail requesting a court order for specific performance (for example, to comply with the franchise agreements and handbook) or to stop certain behaviour that is damaging the brand. It is also possible to place a conservatory attachment on bank accounts or other assets (to be followed by proceedings on the merits) of a rogue franchisee; for example, if he or she stopped paying franchise fees.

Regarding the enforcement of judgments of foreign courts, international private law is applicable. As such, the Hague Conference on Private International Law (‘Executieverdrag’) deals with the recognition and enforcement of judgments in civil and



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the lessee with an incentive when entering into a new lease agreement. The purpose of such an incentive is to stimulate the lessee to actually proceed to enter into the lease agreement for the commercial property offered by the lessor. Some practical examples of incentives are: a rent-free period; a contribution towards the fit-out costs for the furnishings and fittings; tenant improvements (alterations of the premises paid by the lessor on request of the lessee); and step-up rent or limitations (a cap) on the contractual right of indexation.

A rent-free period is the most common incentive. Except for advance payments for service charges and turnover tax (VAT) (generally), the lessee is not obliged to pay any rent during the agreed rent-free period. However, there is no general (legal) prin-ciple that applies to the terms, conditions, duration or amount of the incentive. Generally, transaction-specific variables such as the scope of the transaction, the duration of the intended lease term(s), the economic cycle and market circumstances are deci-sive in most cases. It is obvious that when the real estate market is more owner/lessor-friendly, a lessor is less willing to provide the lessee with attractive incentives than in a tenant-friendly market.

8 Online Trading


No. The requirement in a franchise agreement to refuse or redi-rect passive sales is considered a hard core restriction under the VBER and the accompanying Guidelines on Vertical Restraints. Binding requirements to re-direct sales to another franchisee are therefore not allowed under EU and Dutch competition law. Rules under the EU Geo-blocking Regulation regarding online rerouting of customers’ requests for e-commerce should also be taken into account.


No. The principle of freedom of contract establishes that a fran-chise agreement can provide for a requirement to assign local domain names to the franchisor on the termination or expiry of the franchise agreement.

9 Termination


No. Laws on termination can be found in general contract law in the DCC, but this is complementary and not mandatory law.(i) Statutory provisions on termination for breach. There

are no specific statutory laws on termination of franchise agreements in the Netherlands (other than the obligations regarding goodwill stated above). The applicable legisla-tive framework regarding termination thus mainly exists in general contract law. General contract law (Books 3, 6 and 7 DCC) contains statutory provisions regarding

franchisor or another third party to step into the franchisee’s/lessee’s position if the lessee/franchisee fails to comply with its obli-gations under the franchise agreement is, in essence, a disguised extension of the statutory semi-mandatory (limited) termination grounds for the lessor. The same applies for situations in which the franchise agreement has been terminated and the franchisor (who is often also the franchisee’s lessor) wishes to terminate the lease agreement as well in order to be allowed to occupy the leased premises itself. Such clauses are considered as derogating cove-nants which are, in principle, not valid under Dutch retail lease law.

As a general rule, parties are not allowed to derogate from the statutory semi-mandatory law provisions to the disadvantage of the lessee (the lessee of commercial retail premises enjoys addi-tional protection regarding, amongst others, minimum terms for the lease, statutory notice periods and statutory termination grounds; see answer under question 7.1 for a brief outline), unless the court has granted approval for a derogation in advance. The approval will only be granted (i) if the covenant does not, in any essential respect, restrict any rights of the lessee, and/or (ii) if the lessee’s social position, as compared to that of the lessor, is such that he does not reasonably require the protection of the semi-mandatory lease provisions. Only if the interests of the lessee are sufficiently safeguarded will the court approve the proposed deviation. If a deviation is not approved by the court and a conflict arises, a lessee may set aside the derogating provision and revert to the original provisions of the law. It is possible for parties to agree on a lease under the condition precedent that the court will approve an intended deviation from mandatory law.


Under Dutch property law, there is no distinction made between national and non-national entities. Therefore, there is no specific legal restriction for non-national entities holding any interest in real estate under Dutch property law.

Commercial leases are mostly ‘ROZ’-based. The Dutch Council for Real Estate matters (in Dutch: ‘Raad voor Onroerende Zaken’ or ‘ROZ’) publishes standard agreements and corre-sponding general terms and conditions which are formulated in favour of the lessor. These standard agreements, including corresponding general terms and conditions, are frequently used and have become the de facto standard for commercial leases in the Netherlands. Under these standard general terms and condi-tions, the lessee is not allowed to relinquish the leased property to third parties by leasing, subleasing or allowing the use thereof without prior written approval of the lessor. The same applies to the transfer of tenancy rights. However, deviating arrangements are allowed under Dutch law. In practice, it is sometimes stipu-lated that subleasing to affiliated parties of the lessee is allowed without prior approval of the lessor, or that the lessor at least may not reasonably withhold his or her approval if the proposed new (sub)lessee (affiliate)’s solvency, liquidity and creditworthi-ness are equal to the lessee. It is noted that parties are free to agree upon further conditions in that respect.


Regularly, owners/lessors of commercial property may provide


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franchisee’s employees may be considered an employment agree-ment if three requirements are met. The employee must be: 1) obliged to personally perform the work for a certain period; 2) in the service of the employer (a relationship of authority); and 3) in exchange for a salary. In practice, this often means that the more (direct) influence the franchisor has on the work (such as through specific work instructions) and the way the work is executed (by means of authority and supervision), the bigger the risk that this working relationship may be considered an employment agreement. Published case law shows that it rarely occurs that an employee of the franchisee is considered to be an employee of the franchisor, because there is no (direct) contact with or authority over the employees of the franchisee and the franchisee is usually considered the employer. Of course, the smaller the franchisee (one-man businesses in particular), the higher the risk that the requirements stated above will be met, depending on all facts and circumstances of the case.


The existence of an employment agreement or other type of working relationship with the franchisee does not preclude liability of the franchisor for acts or omissions of a franchisee’s employee. In general, if the franchisor has control and authority (for example, by prescribing specific rules and instructions) over the acts or omissions of the franchisee’s employee constituting the fault, the franchisor may be held liable. In practice, this is not often the case because the control and authority usually lies with the franchisee. To mitigate the risk of liability, the franchisor may include a limitation of liability and express indemnification in the franchise agreement. In addition, a clause stating that the franchisor is responsible for compliance with, for example, the local health and safety legislations, that the franchisee should not solely rely on the franchisor’s manual and guidelines, and that the franchisor must take out adequate insurance against any risks connected to the work can be included in the franchise agreement.



There are no restrictions on the payment of royalties to an over-seas franchisor from a tax perspective. There are currently no withholding taxes on royalty payments in the Netherlands (assumingarm’slengthpricing).AsofJanuary1,2021,awith-holding tax may be due on royalty payments. The withholding tax applies to payments made to affiliated companies in desig-nated low-tax jurisdictions, and in certain abusive situations. Additionally, VAT is, in principle, due on royalty payments.


There are currently no withholding taxes on royalty payments in

termination for breach. Each party can rescind an agree-ment if the counterparty is in default (Article 265 Book 6 DCC). An agreement cannot be terminated based on a breach if, given its special nature or minor importance, the breach does not justify the termination. These rules are of supplementary (non-mandatory) law, and the parties can deviate by agreement, which is generally enforceable.

(ii) Termination for convenience. The Franchise Act and general contract law in the DCC do not provide specific provisions for termination for convenience. It follows from case law that agreements concluded for an indefi-nite term and where parties did not provide a contractual regime for termination, can, in principle, be terminated ‘for convenience’. Contracts for a definite term can be terminated for convenience only if the agreement provides for this. Many franchise agreements in the Netherlands are concluded for a definite term of five or 10 years and this may depend on any lease agreements to which they are linked. Franchise agreements that are concluded for a definite term will end on expiry and can only be termi-nated unilaterally if the agreement stipulates this.


It follows from case law that if the application of a clause in the agreement would lead to an outcome that is unacceptable according to the principle of reasonableness and fairness, a termination for convenience may require a certain notice period, the length of which depends on all relevant facts and circum-stances. It is also possible that the contractual regime for termi-nation leaves an ambiguity or a space, which can be comple-mented by applying reasonableness and fairness. It is therefore crucial to draft contractual termination clauses with great care and sufficient knowledge of Dutch law. Important indicators for the length of a notice period are the duration of the franchise agreement and the degree of dependency.

It follows from case law that if the application of a clause in the agreement would lead to an outcome that is unaccept-able according to the principle of reasonableness and fairness, a termination for convenience may require a certain notice period, the length of which depends on all relevant facts and circum-stances. It is also possible that the contractual regime for termi-nation leaves an ambiguity or a space, which can be comple-mented by applying reasonableness and fairness. It is therefore crucial to draft contractual termination clauses with great care and sufficient knowledge of Dutch law. Important indicators for the length of a notice period are the duration of the franchise agreement and the degree of dependency.



The concept of ‘joint employment’, as developed in the context of franchise in North America, does not exist in Dutch law. Regardless of the agreements between the franchisor and fran-chisee, a working relationship between the franchisor and the



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and fairness if there is a void or ambiguity. In special occa-sions, the contract or clause can be overruled by the principle of reasonableness and fairness if the outcome would otherwise be unacceptable (Article 6:248 DCC).



Yes. The Franchise Act regulates the relationship between the franchisor and franchisee during the franchise relationship (see answers under question 1.7 on disclosure obligations during the term of the franchise relationship and question 13.1 for the principle of ‘good franchisor’ and ‘good franchisee’ ).



See answer under question 1.5. There are no specific statutory disclo-sure obligations in relation to a renewal of an existing franchise agreement.


No. There are no such specific statutory rights of renewal on the part of the franchisee under Dutch law. Some franchise agreements include a clause stating that the agreement can be automatically (tacitly) renewed after the expiry date, or that an explicit renewal process is in place that provides that both parties will have to agree in writing to the renewal.


There are no such specific statutory rights of compensation or damages as a result of the non-renewal or refusal to extend the franchise agreement, because franchise agreements for a defi-nite term will end on expiry. However, the franchisor’s freedom to refuse renewal or extension of the franchise agreement can be limited under the principle of reasonableness and fairness, for example in the circumstance where the franchisor has made promises already regarding an extension, the parties have nego-tiated to the point of no return and agreement in principle, or where prior agreements include a right of extension under particular circumstances. In addition, the franchisor may be liable if a franchisee makes investments shortly before the termi-nation (i.e. expiration) of the franchise agreement that cannot be earned back. This may require that the franchisee be enti-tled to the award of damages (Mattel/Borka case). It is advis-able to communicate, in a timely (this means as early as possible) manner, the intention to let the agreement expire, in particular if the agreement was renewed earlier.

theNetherlands(assumingarm’slengthpricing).AsofJanuary1, 2021, a withholding tax may be due on royalty payments. The withholding tax applies to payments made to affiliated compa-nies in designated low-tax jurisdictions, and in certain abusive situations. For tax purposes, a royalty is defined in line with the OECD Model Tax Convention. Whether a management services fee or a royalty fee is due needs to be considered on a case-by-case basis.


No. There is no requirement that a financial transaction between franchisors and franchisees should be conducted in the local currency.



There is only a risk if the franchisee acts for the risk and account of the franchisor and, if contracts are concluded by the fran-chisee with customers (instead of just bringing leads to the fran-chisor), the franchisee concludes these contracts in the name of the franchisor. In such a situation, the franchise agreement qualifies as a commercial agency agreement under the appli-cable Dutch statutory law, which is based on the EU Directive on Commercial Agents, and would be subject to the mandatory rules under it. Such mandatory provisions are minimum notice periods in case of termination, particular rules on the commis-sion to be paid in particular circumstances and, if there is a lasting benefit after the end of the agency relationship and it is otherwise fair, a goodwill compensation. Normally, franchisees are considered to operate as independent entrepreneurs and not in the name of or on behalf or risk of the franchisor because they operate at their own risk and expense. To avoid the risk that the relationship may be perceived as commercial agency, it is impor-tant that the franchisee clearly indicates on or in his or her prem-ises both the franchisee’s identity (legal entity name) and that the franchisee operates the franchised business in his or her own name and for his or her own account and risk. Usually, a sign in the store and a clear indication on, for example, the receipts (and terms and conditions, if any) that the customer receives upon payment are sufficient.



Yes. The Franchise Act introduces the principle that the parties must behave as a ‘good franchisor’ and a ‘good franchisee’ by acting reasonably both prior to forming and during the fran-chise relationship. What that means, in practice, depends on what can be expected and required from both parties, the type of franchise, the industry, and the size of the franchise chain. In addition, general contract law provides that a contractual rela-tionship can be supplemented by the principle of reasonableness


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See answer under question 17.1. Is it not required to keep a ‘wet ink’ copy for the existence of the franchise agreement under Dutch law.



The COVID-19 crisis has had a great (international) impact on many franchise sectors, such as the hotel & leisure sector and retail sector, and will continue to influence trade in Europe. The COVID-19 crisis has required businesses to find fast, innova-tive, uniform and resolute solutions (e.g. the transition to online sales and services and redesign of the supply chain, warehousing and infrastructure). There is increased pressure and urgency for (international) franchisors to implement changes in a franchise formula or make changes in franchise agreements in their rela-tionships with franchisees established in the Netherlands. We also see a trend that businesses need to ‘go green’ in the post-COVID-19 world. The emphasis is on building a sustainable, green and socially responsible supply chain that can sustain a temporary closing of borders. This may trigger a need for certification and quality control, and it turns a spotlight on product compliance and labelling of products. Product compli-ance and enforcement by authorities will increase as a result. Further, the ongoing digitisation of the global economy and the COVID-19 crisis have accelerated the transition to online sales and services. E-commerce and innovation have become of crucial importance for survival. Businesses who did not make this a priority in the past years now have to scale up and innovate or lose their competitive advantage. Some of these parties will disappear sooner than could be anticipated in normal market circumstances. Other businesses may have profited from the global shift to internet platforms, while others are struggling to find a (commercial) strategy that is compliant with laws and COVID-19 measures but is not loss-making. The Franchise Act provides for prior consultation of franchisees in the Franchise Actasof1January2021,whichmaycomplicatetheprocessandit requires careful planning and communication with the fran-chisees and franchise association, if there is one.



Yes, it follows from the principle of freedom of contract that a franchisor is entitled to impose such restrictions in a fran-chise agreement. Please note the rules on goodwill in the Franchise Act explained above. In general, if such restrictions are not meeting the standard of what a good franchisor would do, e.g. reasonableness and fairness, the restrictions can be unenforceable.


A step-in right, generally used if the franchisor wishes to take over the lease contract, can be implemented in a franchise agree-ment through a clause in the franchise agreement (for example, a purchase option). This is governed by general contract law (see answer under question 1.2). There are no specific registration requirements or other formalities before such right is enforce-able. It is advisable to carefully draft a purchase option clause (and its conditions).


There are no specific registration or other formalities applicable to this situation under Dutch law. The power of attorney is valid and effective if it meets the requirements under general contract law (Article 60 Book 3 DCC). See the remarks made above about ‘good franchisor’, reasonableness and fairness and goodwill.



Electronic signatures are recognised in EU and Dutch law and have legal effect and admissibility as evidence in legal proceed-ings if they meet the requirements that the method for authen-tication of the electronic signature is sufficiently reliable in rela-tion to (i) the purpose that the electronic signature is being used for, and (ii) all other circumstances.


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Kennedy Van der Laan

Martine de Koning is an expert in franchise, distribution and agency transactions and litigation. She combines in-depth knowledge of EU and competition law with a deep understanding of commerce and trade. She is praised for her ‘sharp strategic insight, knowledge and creativity in providing solutions’. She handles litigation and arbitration in a ‘smart, assertive and effective’ manner.Martine structures complex international cooperation such as the setting up of franchise networks and channel agreements. She represents domestic franchisors in their international expansion plans and also assists foreign clients with establishing a presence in Europe, the Middle East and Africa. Martine is a ‘shrewd contract drafter and negotiator’. Martine’s interests include trade unions and treaties (EU, WTO, ASEAN, APEC, NAFTA, Caricom), customs and exports regulations and sanctions. The impact of Brexit on commercial agreements catches her special interest.Martine is a thought leader on competition law and pricing matters, such as rebates, tying, excessive pricing, dynamic pricing, royalties, licence and franchise fees, for dominant and other parties. With her lifelong focus on the fashion and retail sector, she acts for her clients on internet sales restrictions, third-party platform restrictions, geoblocking, omnichannel (seamless marketplace), e-commerce, inventory sharing, dual distribution, horizontal and vertical data sharing, licensing of know-how and technology, loyalty programmes and big data.

Kennedy Van der LaanMolenwerf 161014 BG AmsterdamThe Netherlands

Tel: +31 20 5506 666Email: [email protected]: kvdl.com/en

We are an independent Dutch law firm that was established 25 years ago. We service multinationals, local companies and government bodies with specialist legal know-how and services.We offer a broad range of legal expertise (full service). Together with our clients, and based on our industry knowledge, we reach solid and prag-matic solutions for disputes, transactions and strategic decision-making.Our advice is always concise, clear and guiding.

kvdl.com/en


Franchise 2021

Chapter 16128

Nigeria

ǼLEX

Tiwalola Osazuwa

Davidson Oturu

Nigeria

Frances Obiago

Nigerian transferee must be registered with the National Office for Technology Acquisition and Promotion (“NOTAP”). More specifically, Section 4 of the NOTAP Act states that such agree-ments are registrable if their purpose or intent is, in the opinion of NOTAP, wholly or partially for or in connection with the following:■ useoftrademarks;■ useofpatentedinventions;■ supplyoftechnicalexpertiseintheformoftechnicalassis-

tance of any description whatsoever;■ supplyofdetailedengineeringdrawings;■ supplyofmachineryandplant;and■ provisionofoperatingstaff,managerialassistance,andthe

training of personnel.As a franchise arrangement involves the transfer of tech-

nology, it is required to be registered with NOTAP.


As a result of the absence of a franchise-specific law, there are no pre-contract disclosure requirements or formalities which apply to a franchise arrangement. However, disclosure requirements under the laws of contract will apply. For instance, the prin-ciple of misrepresentation under the common law of contract will apply to a franchise relationship.


Please refer to our answer to question 1.5 above.





Nigeria does not have a specific franchise law, and as such, there is no legal definition of a franchise. However, the Nigerian International Franchising Association defines franchising as a business arrangement whereby the franchisor grants the fran-chise operator (the “franchisee”) the right to distribute certain products or services in a particular way, at a particular location and for specified periods of time. In return, the franchisee pays the franchisor fees and royalties.


There is currently no specific law in Nigeria that regulates the offer and sale of franchises.

However, the National Office for Technology Acquisition and Promotion Act, Chapter N62, Laws of the Federation of Nigeria, 2004 (“NOTAP Act”) regulates the transfer of foreign technology to Nigeria. A franchise arrangement is regarded as involving the transfer of technology and so is regulated by the provisions of the NOTAP Act.


Yes, the franchisee/licensee will be treated as a franchisee under these circumstances.


By virtue of the provisions of the NOTAP Act, all agreements for the transfer of technology between a foreign transferor and a


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a. register with the Nigerian Investment Promotion Commission (applies only to companies with foreign participation);

b. register with the Federal Inland Revenue Service for tax purposes;

c. open a corporate bank in a commercial bank in Nigeria and import capital; and

d. obtain a business permit and expatriate quota from the Ministry of Interior (applies only to companies with foreign participation and in cases where foreigners are to be employed).

Certain sector-specific requirements could apply depending on the sector in which the new business entity intends to operate.

3 Competition Law


There are no competition laws which specifically regulate the offer and sale of franchises. However, the Federal Competition and Consumer Protection Act 2019 (the “FCCPA”), which applies to all undertakings and activities within Nigeria, prohibits persons from entering into agreements that have the effect of restraining or preventing competition. Any agreement entered into in violation of the FCCPA will be void and of no legal effect.


Yes, the NOTAP Act stipulates that an agreement for the transfer of technology must not exceed a term of 10 years. In practice, however, NOTAP usually approves a franchise agree-ment for a period of three years and upon its expiration, it may be renewed for further periods of three years.


No, there is no maximum permitted term and parties are gener-ally at liberty to agree on a term. However, it should be noted that NOTAP has the power to refuse the registration of a fran-chise agreement which contains provisions that impose an obli-gation on the franchisee to acquire equipment, tools, parts or raw materials exclusively from the franchisor or any other person or given source.


Yes, NOTAP has the power to refuse the registration of a fran-chise agreement which contains any provision on resale prices which are in contravention of the Price Control Act or any other enactment relating to prices imposed for domestic consumption or for exportation.

In addition, pursuant to the FCCPA, any term or provision in an agreement for the sale of goods will be void to the extent that it purports to establish minimum prices for the resale of goods in Nigeria.




No, there are no prescribed requirements that must be met.


No, membership of a national franchise association is not mandatory. There is also no commercial benefit derived from belonging to a national franchise association.


No, membership of a national franchise association does not impose any additional obligations on franchisors.


There is no legal requirement that mandates that documents should be translated into a local language. However, as the offi-cial language in Nigeria is English, in practice, all documents are required to be in the English language.



Yes, there are. Generally, under the Companies and Allied Matters Act, Chapter C20, Laws of the Federation of Nigeria, 2004, every person who intends to carry on business in Nigeria must, in the first instance, incorporate a local company for that purpose.

Furthermore, the Immigration Act 2015 and the Nigerian Investment Promotion Commission Act, Chapter N1, Laws of the Federation of Nigeria, 2004 provide that a company with non-nationals must ensure that it registers its business and also obtains a business permit, to be able to carry on business in Nigeria.


In Nigeria, the business entities typically used by franchisors are limited liability companies, which may be either private or public.


To commence trading in Nigeria, a new business entity must fulfil the following requirements:


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5 Liability


As a result of the absence of a franchise-specific law, there are no mandatory disclosure requirements or formalities which apply to a franchise arrangement. Disclosure requirements under the laws of contract will, however, apply. For instance, the prin-ciple of misrepresentation under the common law of contract will apply to a franchise relationship.


Please refer to our answer to question 5.1.


There are no statutory restrictions on the inclusion of disclaimer clauses in a franchise agreement. Therefore, it may be possible for a franchisor to avoid liability on the basis of such disclaimer. However, we are not aware of case law on this point.


As a result of the absence of franchise-specific laws in Nigeria, there is no law which regulates the institution of class actions by aggrieved franchisees. Under Nigerian civil law, however, the institution of class actions by aggrieved persons is permitted.

A franchise agreement may, however have specific dispute resolution clauses that would provide that any dispute that arises between the franchisor and the franchisee must be settled by arbitration or other alternative dispute resolution mechanisms. This may prevent the aggrieved franchisees from bringing a class action as they would all have to institute their respective suits against the franchisor.

6 Governing Law


Contracting parties generally have the freedom to choose the law that would regulate their transaction and the courts would generally uphold foreign choice of law clauses as long as these do not violate the provision of any Nigerian law.


No, there are no such obligations.


Under Nigerian law, non-compete or non-solicitation clauses are regarded as covenants in restraint of trade and are generally prima facie unenforceable, unless they are reasonable with refer-ence to the interest of the parties concerned and of the public.



An invented word, device, label, ticket, brand, letter, numeral, company name or any combination of the above can be regis-tered with the Trademarks Registry as a trademark in Nigeria. Marks which are deceptive or scandalous, generic and descrip-tive, geographical names in their ordinary signification or chem-ical substances cannot be registered as trademarks.

Nigeria is a first-to-file jurisdiction; therefore, for a mark to enjoy statutory protection, it must be registered in Nigeria. An application to register a trademark must be made to the Registrar of Trademarks and must contain the specification of goods.

The registration process currently takes between 12–18 months. A trademark is registered for an initial period of seven years but can be renewed for further periods of 14 years.

An unregistered trademark can be protected in Nigeria under the common law tort of passing off. For this purpose, the owner of the unregistered mark must show that:■ Thetrademarkhasacquiredgoodwill.■ Use of themark by the third party is likely to result in

confusion or deception.■ Useofthetrademarkbythethirdpartyislikelytocause

damage.


Trade secrets and confidential information do not have statutory protection in Nigeria but may be protected by contract, law of tort and other basic legal principles.


Yes, operations manuals and proprietary software are regarded as literary works which are protected as copyrights.

However, Nigerian law does not provide for the registration of eligible works, as copyright arises automatically upon the creation of a work. A work is not eligible for copyright protec-tion unless sufficient effort has been expended to give it an orig-inal character and it is fixed in a definite medium of expression.


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even be considered unusual, an agreement of the parties in rela-tion to a conditional lease will be enforceable.


Yes, the Acquisition of Lands by Aliens Law of the various states in Nigeria contain restrictions on the right of non-national enti-ties to acquire interest in real estate.

Under the Acquisition of Lands by Aliens Law of Lagos State, for instance, non-national entities are not permitted to acquire any interest or right (for more than three years) in or over any land from a Nigerian, unless the transaction under which such interest or right is being acquired has been previously acquired by the Governor.


It is possible for a tenant in Nigeria to enjoy rent-free periods or periods where lower rent may be paid, especially where the tenant intends to make significant renovations that will improve the value of the leased property. Rental value is generally dictated by a number of factors, including the location and state of a property.

8 Online Trading


Yes, the franchise agreement may contain provisions to this effect.


No, there are no such specific limitations.However, NOTAP has the power to refuse the registration of

a franchise agreement which imposes an obligation on a fran-chisee to assign to the franchisor, or any other person desig-nated by the franchisor, patents, trademarks, technical informa-tion, innovations or improvements obtained by the franchisee with no assistance from the franchisor or such other person.

9 Termination


There are no mandatory laws that might override the termina-tion rights of the parties to a franchise agreement. The terms on

However, by virtue of Section 6 (2) of the NOTAP Act, NOTAP may refuse to register any agreement which compels the franchisee to submit to foreign jurisdiction in any contro-versy arising for decision concerning the interpretation or enforcement in Nigeria of any such contract or agreement or any provisions thereof.

Though, in practice, NOTAP has a preference for the adop-tion of Nigerian law as the governing law of a franchise agree-ment, it is not unusual for the choice of law of a foreign jurisdic-tion to be accepted, particularly English law.


Interim/interlocutory foreign orders/judgments are not enforce-able in Nigeria. Nigerian courts will permit the registration and enforcement of a foreign order/judgment only if it is final and conclusive between the parties thereto and it is payable, there-under, a sum of money, not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty.


Yes, arbitration is recognised as a viable means of dispute reso-lution and Nigeria is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Nigeria acceded to the convention on March 17, 1970 anditcameintoforceonJune15,1970.Theconventionissetout in the Schedule 2 to the Arbitration and Conciliation Act, Chapter A18, Laws of the Federation of Nigeria (Arbitration Act) pursuant to Section 54 (1) of the Arbitration Act.

The more commonly used arbitral rules include: the Arbitration Rules made pursuant to the Arbitration Act; the United Nations Commission on International Trade Law (“UNCITRAL”) Rules; and the Rules of Arbitration of the International Chamber of Commerce.

7 Real Estate


Typically, leases are granted for a term of three to five years and are made subject to renewal by the parties.


While this is not a common arrangement in Nigeria, and can


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Payments to an overseas franchisor may be made in any convertible currency including British Pounds, United States Dollars and Euros.


Yes, withholding tax at a rate of 10% will apply to royalty payments made to an overseas franchisor.

The tax exposure of the franchisor may be reduced if the fran-chisor is incorporated in a country with which Nigeria has a double taxation agreement. Some of the countries with which Nigeria currently has a double taxation agreement include: Belgium; Canada; China; the Czech Republic; France; Italy; the Netherlands; Pakistan; Romania; the Slovak Republic; South Africa; and the United Kingdom.

The withholding tax requirement will not be avoided by struc-turing royalty payments as a management services fee as the same withholding tax rate will apply.


Yes, all transactions conducted between a Nigerian franchisor and franchisee are to be denominated in Naira, which is the official currency in Nigeria. This will not apply to payments from a local franchisee to a foreign franchisee or any other foreign entity.



Under the common law doctrine of privity, it is only the parties to a contract that can enforce the contract with the aim of seeking its benefits. The contract cannot bind a third party, and third parties cannot take or accept the benefits or liabilities under it. On this basis, a third party cannot seek to enforce a franchise agreement to which it is not a party; and neither can a third party sue a fran-chisor for business relations between itself and the franchisee.

An exception to this doctrine is where an agency relationship can be established, as between the franchisor and franchisee, and in which case, the franchisee is construed as being the fran-chisor’s agent. In this case, the franchisor may be liable for the actions of the franchisee.

However, in many cases, the franchisee is a distinct business entity from the franchisor and it may be difficult for a third party to prove an agency relationship between the franchisor and the franchisee, i.e. it dealt with the franchisee under the impression that it was in fact dealing with the franchisor.



which a franchise agreement will be terminated, and the conse-quences of such termination, will be as agreed by the parties in the franchise agreement.


Please see our response to question 9.1 above.



The risk that the franchisor may be regarded as a joint employer may arise if the franchisor performs, in respect of the fran-chisee’s employees, certain duties of an employer such as paying salaries, carrying out performance evaluations and appointing or terminating employments.

In view of the limited amount of control which a franchisor is permitted to exercise over the operations of a franchisee by NOTAP, this risk should be mitigated if the parties in their operations comply with the NOTAP Act and guidelines.

It is also common for clauses expressly stating that neither party is an employee, agent or partner of the other to be inserted into franchise agreements.


No, this risk will only arise where the franchisor and franchisee are regarded as co-employers.



Yes, one of the consequences of a failure to obtain NOTAP’s approval in respect of a franchise agreement is that the franchisee will be unable to make remittances to an overseas franchisor from funds obtained from the official foreign exchange market.

By virtue of the provisions of the Foreign Exchange Manual issued by the Central Bank of Nigeria, offshore franchise fee payments can only be made by a commercial bank, upon pres-entation of the prescribed documentation. These include:■ adulycompletedForm“A”;■ acertifiedcopyof thefranchiseagreementregisteredby

NOTAP;■ acertificateofregistrationissuedbyNOTAP;■ ademandnotefromthefranchisor;■ evidenceofpaymentoftaxontheamounttoberemitted;■ auditedaccountfortherelevantperiod;and■ confirmationofreasonablenessoffeesfromNOTAP.


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Yes, such a power of attorney will be recognised by the courts. Note, however, that a power of attorney requiring the donee to execute a deed must be under seal.

Although attestation of a power of attorney is not a mandatory requirement, it is necessary that a power of attorney be attested to byaNotaryPublic, JudgeorMagistrate for thepresumptionofdue execution. Where the power of attorney is executed outside Nigeria, it may be witnessed by a Notary Public who attests or certi-fies deeds and other documents and has worldwide recognition.



Generally, electronic signatures are acceptable and recognised as a valid way of creating a binding agreement. Statutory provi-sions in support of this are found in the Evidence Act 2011 and the Cybercrimes (Prohibition, Prevention, etc.) Act 2015. Note however, that in Nigeria, many government agencies, and in particular, NOTAP require “wet ink” signatures on documents submitted to them.


Yes. Under Nigerian evidence law, copies of a document made from the original by mechanical or electronic processes can be admitted as secondary evidence if the original has been lost.

It is, however, not advisable to destroy the hard copy of the agreement without cause. Please also take note of our response for question 17.1 above.



A threat to franchising as a result of the Coronavirus pandemic is the ability of franchisees and franchisors to fulfil their contractual obligations under their respective franchise agree-ments such as payment of royalties and provision of supplies and technical assistance. Franchisees are also likely to see reduced sales and profits during the pandemic, which will result in lower income for franchisors as well.

To remain competitive, franchisees will need to create strong delivery infrastructures or improve on existing ones.

There are no express or implied obligations imposed on a franchisor under Nigerian law. The obligations of the parties will be determined by the express provisions of the franchise agreement.



No, there are no specific laws. The laws of contract will operate to regulate the relationship between a franchisor and franchisee.



There is no law that imposes disclosure obligations in rela-tion to the renewal of an existing franchise. However, the laws of contract will operate to enforce any contractual terms on renewal, which may be contained in a franchise agreement.







Yes. This may be regulated by contract between the franchisor and franchisee.


Yes, a step-in right will be recognised under Nigerian law. The formalities for this will depend on how the parties intend for the step-in right to be exercised.


134

Davidson Oturu is a Partner in the firm’s Technology, Media and Telecommunications (“TMT”) and Intellectual Property (“IP”) Practice Groups. He provides strategic advice regarding intellectual property, e-Privacy laws, cybersecurity, blockchain technology, data privacy and inter-national data transfers. He assists clients with remediating high-stakes multi-jurisdictional cybersecurity breaches, negotiating complex technology transactions, franchising and intellectual property licensing.Davidson is a member of the International Trademark Association, the International Technology Law Association, the Chartered Institute of Trademark Attorneys (UK), the Intellectual Property and Technology Law Committee of the International Bar Association (“IBA”) and the Intellectual Property Law Group of the American Bar Association International Section.The Legal 500 in its 2020 rankings described him as being notable for handling TMT and IP disputes. He was also recognised as a Recommended Individual by the World Trademark Review 1000 and was recommended as an expert by Chambers & Partners in its 2020 Fintech Guide.

ǼLEX4th Floor, Marble House1 Kingsway Road, Falomo, Ikoyi, LagosNigeria

Tel: +234 1 2793 3678Email: [email protected] URL: www.aelex.com

Franchise 2021

Nigeria

Tiwalola Osazuwa is presently a member of the Corporate & Commercial, Intellectual Property and Mergers & Acquisitions Practice Groups at ǼLEX.She has advised local and multinational companies on corporate structure, regulatory compliance and acquisitions. She was part of the team which advised The Coca Cola Company on its acquisition of a 100% stake in C.H.I. Limited, Nigeria’s leading still beverages producer. She is currently leading the Nigerian legal team in a transaction for the acquisition of a health maintenance organisation.Within the intellectual property practice, she regularly advises clients on the protection of intellectual property rights, IP portfolio management and proffering legal solutions for combating counterfeiting of products and parallel imports. She has been involved in several high-profile franchising transactions. She is a member of the Trademarks Office Practice Committee of the International Trademark Association and the Corporate and M&A Law Committee of the International Bar Association.


Tel: +234 1 2793 3678Email: [email protected]: www.aelex.com

ǼLEX is a full-service commercial and litigation law firm with one of the largest offices in West Africa. ǼLEX has offices in Lagos, Port Harcourt and Abuja in Nigeria and Accra, Ghana.ǼLEX has earned a reputation for excellent work in various practice areas including Dispute Resolution, Intellectual Property, Franchising & Licensing, Corporate/Commercial, Telecommunications & Technology, Taxation, Banking & Finance, Mergers & Acquisitions, Infrastructure, Energy and Natural Resources, Foreign Direct Investment, Labour and Employment, and Transportation.Lawyers in the firm are admitted to practise in several jurisdictions including Nigeria, New York, Ghana, England and Wales, and are qualified in disciplines such as political science and engineering.

The quality of the firm’s work has led to it receiving top rankings and being featured in The Legal 500, Chambers Global Guide, IFLR 1000’s Guide to the World’s Leading Law Firms and Who’s Who Legal – as Nigerian ‘Firm of the Year’.

www.aelex.com

Frances Obiago is an associate at ǼLEX. Her practice areas include Intellectual Property, Corporate & Commercial and Labour & Employment.She advises clients on various intellectual property matters (both of a contentious and non-contentious nature) relating to trademarks, patents, copyright, franchising, licensing, distributorship arrangements and technology transfer.She also manages the intellectual property portfolios of several companies such as MTN Group Management Services, Kentucky Fried Chicken and Interswitch Limited amongst others; and assists with filing applications for the registration/renewal of trademarks, patents and designs.She has advised several clients on the registration and renewal of their franchise and management service agreements with the National Office for Technology Acquisition & Promotion (“NOTAP”) and the registration of products with the National Agency for Food and Drug Administration (“NAFDAC”).She is a member of the International Trademark Association (“INTA”), the Anti-Counterfeiting Collaboration and the Intellectual Property and Entertainment Law Committee of the IBA.


Tel: +234 1 2793 3678Email: [email protected]: www.aelex.com


Franchise 2021

Chapter 17 135

Romania

SCA RUBIN MEYER DORU & TRANDAFIR Cristina Tararache

Romania

■ Introduce the concept of “pilot unit”. The pilot unit isdefined by the law as the equivalent of a prototype, meant to ensure the most facile implementation of the fran-chisor’s successful network, to test the franchise system and its infrastructure, supporting the franchisors to design the franchise programme and elaborate the training manuals and daily operations. There is a one-year period established by the law in which franchisors must test and finalise their franchise business types, after which these business types may be further sold as franchise business. Therefore, until the initiation of the franchise network, franchisors must test and operate the business concept in a pilot unit for a one-year period.

■ Setting up theNational FranchiseRegistry (“RNF”), tomonitor the franchise business and obtain statistical data. Further details on the RNF may be found under question 1.4 below.


Yes; if the franchisor is proposing to appoint only one fran-chisee/licensee in a jurisdiction, the respective franchisee/licensee will be treated as a franchisee for the purpose of any franchise disclosure or registration laws.


One of the main provisions of the Franchise Amending Law concerns the creation of the RNF. The obligation to create and operate this registry belongs to the Franchise Association of Romania, which is an association of public utility. Based on the provisions of the Franchise Amending Law, the RNF was estab-lished in October 2019. It is an online registry and it covers the following main topics: registration; amendment/completion; and cancellation. Franchisors may therefore register with the RNF the disclosure document for free. The RNF represents a unitary means of evidence of the information provided by the franchisors or master franchisees throughout the disclosure document.

Additionally, two other potential registration require-ments apply in Romania, one with the Competition Council, and one with the Trademark Office. Generally, according to the Romanian Competition Law No. 21/1996 as further amended and republished, franchise agreements need to be filed with the Competition Council. If a particular franchise



According to the Romanian franchise-specific law, i.e. Government Ordinance No. 52/1997 as amended and completed by Law No. 179/2019 (hereinafter the “Franchise Law”), fran-chise is defined as “a trading system of products and/or services and/or technologies, based on a continuous collaboration between natural persons or legal entities, each of them legally and financially independent from the other, whereby a person named franchisor grants to another person named fran-chisee the right and imposes the obligation to operate a business, in compli-ance with the franchisor’s concept. This right authorizes and obliges the franchisee, in exchange for a direct or indirect financial contribution, to use the trademarks of products and / or services, other protected intellectual or industrial property rights, know-how, copyrights, as well as signs of traders, benefiting from a continuous contribution of commercial and / or technical assistance from the franchisor, within and during the franchise contract concluded between the parties for this purpose”. A key concept of the franchise system is the franchise network, meaning contractual relations established between the franchisor and one or more franchisees, meant to promote a technology, product or service, as well as to develop their production and distribution.


In Romania, franchise relations are subject to the Franchise Law, as defined in question 1.1 above. The provisions of the Franchise Law are supplemented with the provisions of the Civil Code and of the Fiscal Code. Other laws that have an impact on franchises in Romania are Law No. 21/2996, as further amended and republished on competition relations, and Law No. 84/1998 on trademarks and geographic indications.

Since 1997, franchise was regulated in Romania by Ordinance No. 52/1997. In 2019, after a long period of debates, an amendment and completion to the aforementioned Ordinance was adopted, namely Law No. 179/2019, effective since October 14, 2019 (here-inafter the “Franchise Amending Law”). The main amendments brought by the Franchise Amending Law are the following: ■ Introduceby law the term“franchisee” tonominate the

franchisor’s partner (replacing the term “beneficiary”). ■ Useoftheterm“disclosuredocument”byallfranchisors,in

order to unify all the disclosure and information procedures for all potential franchisees. Further details on the disclo-sure document may be found under question 1.7 below.


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prior to the actual execution of the franchise contract, the role of complying with such disclosure obligations being merely to empower the franchisee to make knowledgeable decisions whether to conclude the franchise agreement or not, franchisors’ non-complying with these obligations does not trigger contrac-tual liability; on the other hand, general liability under the provi-sions of the Civil Code may be however triggered for failure to fulfil these obligations, for breaching the legal provisions which require the compliance with these obligations, and damages may be requested based on the provisions of the Civil Code.


There are no other requirements which must be met before a franchise is offered or sold.


Being a member of the Franchise Association of Romania is not mandatory, but it is advisable. According to the provisions of the Franchise Amending Law, the Franchise Association of Romania is the entity which established the RNF and which is in charge of its operation.


The Franchise Association of Romania has adopted its own Code of Ethics, in line with the European Code of Ethics, and of course in full compliance with the provisions of the Franchise Law. Becoming a member of the Franchise Association of Romania involves the adherence to the Code of Ethics.


There is no requirement to have the franchise or disclosure documents translated into Romanian. On the other hand, in the pre-contractual stage, the franchisor is obliged to disclose the pre-contractual information to the franchisee in such a manner so as to allow the latter to make a decision on whether to enter the franchise relation in full awareness. Moreover, as regards the contractual phase, the Franchise Law states that the fran-chise contract must clearly and with no ambiguity define each party’s rights and obligations and liabilities, as well as any other clauses regarding the collaboration between the parties.

Therefore, even though there is no requirement to have the franchise and disclosure documents translated into Romanian, the franchisor should take the required steps to have these docu-ments drafted into a common language and, in case of start-up company franchisees, even in Romanian.



There are no such restrictions imposed under Romanian law.

agreement benefits from one of the exemptions specified by the Competition Law, notification with the Competition Council is no longer needed. Trademark protection is awarded through registration with the national authority or through the European Union or international registration.


The obligation to provide pre-contractual information is specifi-cally regulated by the Franchise Law. According to the Franchise Law, in the pre-contractual phase, a franchisor is required to provide the prospective franchisee with certain information through a “disclosure document”. The purpose of such disclosure is to enable the franchisee to make an appropriate decision when entering into the franchise relationship. The disclosure document must be submitted before the franchisee undertakes any legal obli-gations with respect to the proposed business. No specific penal-ties are provided by the law in case of failure to provide such pre-contractual information. However, the franchisee has the right to file a lawsuit against the franchisor for damages caused as an effect of such non-disclosure or incomplete disclosure. The burden of proof of any damage is on the franchisee. Theoretically, criminal liability for misrepresentation is also conceivable.


Yes, the obligation to provide pre-contractual information does also apply to contracts concluded with the sub-franchisee. The Master Franchisee is required to provide the required disclo-sure to the sub-franchisees. The Master Franchisee may use the information provided by the franchisor emphasising its own contractual obligations.


There is no format for the disclosure document. Nevertheless, the Franchise Law states the concept of “disclosure document”, also mentioning the main information which must be included in this document: experience and history of the franchisor; details about the identity of the franchise management; list of litigations involving the franchisor and its management; initial amount which must be invested by the franchisee; copies of the financial results of the franchisor during the last year; and infor-mation on the pilot unit.

The information included in the disclosure document needs to be provided prior to the execution of the franchise contract itself, its role being to enable the franchisee to make an appropriate deci-sion regarding its entering into the franchise relation. Therefore, this is only a pre-contractual obligation of the franchisor, and it shall not apply after the execution of the franchise contract.

Until the commencement of the franchise network, the fran-chisor will efficiently operate a business concept for a minimum one-year period in a pilot unit.


Since the disclosure obligations must be fulfilled by franchisors


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franchisee, whether direct or indirect, is prohibited under both European and national legislation, being deemed as a hard-core restriction, and it could be sanctioned with fines of up to 10% of the turnover registered by the company before the year it has been sanctioned. Maximal or non-binding prices may, however, be stipulated. There are also few exceptions on the prohibition to establish/maintain resale prices. According to the European Block Exemption Regulation, fixing resale prices in short marketing actions shall not be subject to the restriction.


Romanian law does not state any minimum requirements for franchisors when appointing franchisees in adjoining territories. However, if franchisees are granted exclusivity, the franchisor must not directly or indirectly compete with the respective fran-chisees in the area granted under exclusivity.


In order to protect its know-how, the franchisor may include an in-term and also post-term non-compete clause in the franchise contract. The post-term non-compete clause shall be valid only if related to the goods or services competing with the goods or services covered by the franchise contract, if limited to the area where the franchisee was active during the contract, if it is indispensable for the protection of the franchisor’s know-how, and if limited to one year since the termination of the franchise contract (according to Regulation No. 330/2010).



A trademark licence agreement must be registered with the Romanian State Office for Inventions and Trademarks (“OSIM”) unless one of the following situations occurs: the respective trademark has been previously registered with OSIM; the trademark has been registered at EU level with the Office for Harmonization in the Internal Market (“OHIM”) – Trademarks and Designs, headquartered in Alicante, Spain as a commu-nity trademark; or the trademark has been registered interna-tionally and such registration covers Romania. The benefi-ciary of the licence agreement might be authorised to use the trademark throughout the Romanian territory or only part of it, for all or for some of the products or services, for which the trademark has been registered. The licence may be exclusive or non-exclusive. The trademark’s holder may revoke the licensee’s right to use the trademark if they are in breach of the provisions of the licence agreement. Third parties are obliged to observe the rights granted to the licensee under the licence agreement, and thus the licensee may seek protection against any fraudulent use by third parties, provided only that the licence agreement is registered with OSIM, it is a community trademark – there-fore applicable in Romania – or it is an internationally registered trademark covering Romania. Failure to register the licence agreement with OSIM results in the fact that the licence is not binding upon third parties, meaning that the franchisee cannot enforce the rights under the trademark against third parties.

However, if the franchise business entails the acquisition of land, it should be noted that persons/entities from coun-tries outside the EU/EES may obtain ownership over land in Romania only based on a mutual agreement between Romania and their country of origin. They may of course obtain other real rights over land should the franchise business require it.


If the franchisor is based abroad, and it intends to develop its franchise activity in Romania by a locally based entity, the most typical entities used are the branch and the limited liability company.


There are registration requirements in both cases with the Trade Registry where the headquarters of the newly established company/branch will be located. Both types of companies also need to be registered with the tax authorities.

3 Competition Law


Franchise networks in Romania need to observe both the European regulation regarding anti-competitive practices (Article 101 of the Treaty on the Functioning of the European Union) and the national Competition Law, i.e. Law No. 21/2996 as further amended and republished. Franchise relations must also comply with the provisions of the Commission Regulation No. 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, which provides the condi-tions under which vertical restraints are exempted from the prohi-bition on anti-competitive agreements.


The Franchise Law does not establish a minimum or maximum duration of the franchise contract. The only requirement set by law refers to the fact that the franchisee needs to be able to amortise the investment. However, according to the Franchise Law, the duration of the franchise contract must be stated in the franchise contract itself. Franchise contracts are usually no longer than five years so that they comply with the provisions of Commission Regulation No. 330/2010, mentioned above.


The limitation under question 3.2 above shall apply.


The franchisor’s fixing of minimum resale prices on the


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Franchisors cannot avoid liability for pre-contractual misrep-resentation by including disclaimer clauses in the franchise contract. Such a provision would be unenforceable.


Class actions are not expressly regulated under Romanian law and they are permitted in areas like consumer protection, employment and insolvency. This does not cover the area of franchises. However, coordinated individual actions may be initiated before the Romanian courts by dissatisfied franchisees.

6 Governing Law


There is no requirement for franchise contracts to be regulated by Romanian law. Moreover, the Rome I Regulation and international legislation allow for the choice of law between contracting parties. The Rome I Regulation, however, states that, in the absence of the parties’ choice on the governing law of the contract, the law of the country where the franchisee has its regular residence shall be applicable.


Decisions issued by courts in other EU Member States on civil and commercial matters are recognised in Romania, no further formality being required, and they may be enforced in Romania and no declaration of enforceability is required. As regards deci-sions issued by non-EU countries, and where there are no appli-cable treaties or conventions, the respective decisions firstly need to be recognised by Romanian courts in order to be effec-tive in Romania. Urgent interim relief and conjunction proce-dures are also allowed under Romanian law.


Romania has been a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards since September 16, 1961. Arbitration is indeed recognised as a viable means of dispute resolution, provided that the parties contractually agree on such clause. No specific set of arbitral rules is preferred in practice, since the selection of the arbitral rules depends on various factors related to the contrac-tual parties’ identity, location, major place of activity, etc.


Know-how, trade secrets and other business-critical confiden-tial information are not protected as such under Romanian law. However, reference to trade secrets is made in Law No. 298/2001 amending and completing Law No. 11/1991 on unfair compe-tition practices. This law defines a trade secret as information which is not public, nor easily available to individuals acting in a business where such type of information is customarily used, and which becomes valuable by being kept secret by its holder through reasonable measures. The unlawful disclosure, acqui-sition or use of a trade secret by any person constitutes, as the case may be, a tort or a criminal offence. The enforcement of these provisions will likely remain difficult because of a lack of judicial experience.


Romania offers copyright protection pursuant to Law No. 8/1996 (the “Copyright Law”). Romania has a Romanian Office for Copyright Protection that was established in 1997, but copy-right enforcement is still fairly burdensome, which is why piracy remains a concern in areas such as computer programs, software, music and books.

5 Liability


If the franchisor’s mandatory disclosure obligations are contra-vened, the franchisee may terminate the franchise contract for the franchisor’s faulty non-performance of its obligations, and also ask for damages by proving that it had not concluded the contract, if the complete or adequate information had been prop-erly disclosed by the franchisor. It is therefore recommended that the franchise contract provides for specific clauses regulating the consequences of breach of contract on the part of the franchisor.


The corresponding contracting party is liable towards the other contracting party for its breach of the pre-contractual infor-mation disclosure. In principle, there are no legal limitations on the enforceability of an indemnity right granted to the fran-chisor against the master franchisee. However, Romanian law prohibits the renunciation or limitation of the liability for the material damage caused to the other party with intent or gross negligence. It is, however, allowed to limit the indemnity or to establish an amount by way of a penal clause.



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There is no limitation on the assignment of local domain names, if such assignment has been agreed upon in the franchise contract and it has also been agreed that the obligation shall survive after the termination of the agreement.

9 Termination


Termination rights are usually stated in the franchise contract and, if not, general legal provisions shall apply.


In case of denunciation of the contract (termination for no fault), there is no rule to determine the minimum notice period. However, in case the parties have not contractually established the notice period and the dispute goes to court, the duration of the notice period shall be analysed from the perspective of its reasonability. In case of termination for fault, if the parties have not contractually established the notice period, the law does not impose a minimum. The Franchise Law also requires that the parties contractually establish the circumstances under which a faulty termination with no prior notice may take place.



In principle, there is no risk in qualifying the franchisor as joint employer together with the franchisee, since the franchisor and franchisee are independent entities from one another, and the franchisee will manage its business, including its employees, independently from the franchisor. The franchisee relation may, however, be qualified as an employment relation if, regardless of the contractual provisions, the actual circumstances attest that the franchisee – the natural person – is not actually independent from the franchisor and there actually is a relationship of subor-dination between them.


Since the franchisor and franchisees are independent from one another, the franchisee is the only one liable for the franchisee’s

7 Real Estate


According to the Civil Code, the maximum duration of a lease agreement is 49 years. Typically, the lease agreement is concluded for a certain period in consideration of the type of activity to be undertaken. The lease under Romanian law is not a strong right, providing only for the attribute to use the premises.


The concept of an option/conditional lease assignment is possible, although not common practice.


There are no such restrictions on non-nationals from EU/EES countries. As regards persons/entities from countries outside the EU/EES, they may obtain ownership over land in Romania only based on a mutual agreement between Romania and their country of origin. There is no restriction with regard to obtaining other real rights on the land, except ownership.

There is no restriction to sub-lease by non-nationals, only provided that sub-leasing is expressly allowed and provided under the main lease agreement.


The real estate market in Romania has faced a severe drop in recession years, but it is now rebalanced. The real estate value, however, substantially differs according to the geographical area of the premises. An initial rent-free period is usual in commer-cial leases, especially since landlords request for the payment of several months’ rent in advance (usually three months), and for the submission of a deposit, meant to secure the lessee’s perfor-mance of obligations under the lease agreement.

8 Online Trading


Online distribution is deemed as a passive sale, and this cannot be prohibited in principle.


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There are no specific laws regulating the relationship between the franchisor and franchisee once the franchise agreement has been executed. The general principles of civil and commercial law shall, however, apply.



According to the Franchise Law, the conditions of renewal of the franchise contract must be stated in the contract itself. There are no further disclosure obligations applicable in case of renewal of the contract, except for those provided in ques-tion 1.4 above.


There is no such right for a franchisee to be automatically enti-tled to the renewal or extension of the franchise contract.


This depends on the provisions of the franchise contract on renewal/extension. In case the respective provisions have been breached by the franchisor, the franchisee shall be entitled to compensation or damages.



Such restrictions are possible under Romanian law.


The franchisor may be granted the right to step into the fran-chisee’s lease at the end of the franchise contract, or it may be

employees’ acts or omissions in performing within the fran-chised business.



There are no such restrictions under Romanian law.


According to the Romanian Tax Code, as further amended, royalties paid to a non-Romanian entity are subject to a with-holding tax of 16%, unless lower percentages are provided by the treaties between Romania and other countries for the avoid-ance of double taxation.


There are no such restrictions under Romanian law.



The agency contract is regulated distinctively under Romanian law. In principle, since the franchisee is acting in its own name and on its behalf, independently from the franchisor, while the commercial agents act in the name and on behalf of the prin-cipal, in exchange for a commission, there should not be any confusion between the two contracts. However, since the actual content and nature of a contract are relevant for the qualification of a contract, and not the name given by the parties, if circum-stances show that the franchisee is actually acting in the name and on behalf of the franchisor, the contract may be reclassified into a commercial agency contract.



The principle of good faith in contractual relations governs the entire Romanian legal system. Moreover, according to the provisions of the European Code of Ethics, franchisors and franchisees shall act with loyalty and fairness in their contractual relations and solve their disputes with loyalty and good faith.



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In such case, the paper document may be destroyed, but only provided that the electronic version is stored in full compli-ance with the data protection rules, and also provided that the destruction of the physical document is done in compliance with the applicable legal provisions.



Generally, the pandemic affected franchise businesses in terms of sales and supply chains. During the lockdown period, the force majeure clause was used by some entities trying to escape from their franchises. Certain sectors were clearly more affected than others and to various degrees, like, for instance, in the tourism, food and hospitality industries. However, what became clear during the lockdown was the necessity to increase online supply channels, to have a more flexible supply chain, to improve communication with the franchisees and their suppliers, and to have a larger and more diverse customer base – all this should be seen now by franchisors as opportunities to grow, improve and innovate.

given the option to purchase the franchisee’s business; however, in order to be effective, the procedure should be detailed in the agreement.


A power-of-attorney will be valid if compliant with the local requirements governing the mandate. According to the appli-cable legal provisions, a power-of-attorney shall be valid for three years unless a specific duration is stated in the power-of-attorney itself.



Electronic signatures are recognised as a valid way to conclude a franchise agreement, and documents signed by way of elec-tronic signature have the same legal force as the ones physically signed. However, when the franchisor creates a “remote” fran-chise system, it can be difficult to directly provide services and control the franchisee.


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Cristina Tararache specialises in distribution law, franchise and antitrust (national and EU), and also in energy and other regulatory matters. Cristina is the author of the Agency and Distribution Chapters for Romania for the International Distribution Institute and co-author of the Romanian Chapter on Franchising published in ABA’s Franchising in Europe Book. Cristina’s educational background includes an LL.M. in European Union Law, and also diplomas from the Academy of European Law on European Private Law, and from the University Libre de Bruxelles. Cristina is a member of the Bucharest Bar Association and is a certified English translator.

SCA RUBIN MEYER DORU & TRANDAFIR Arthur Verona 2District 1, 010313BucharestRomania

Tel: +40 21 311 1459/60Email: [email protected]: www.rmdt.ro

Franchise 2021

Romania

SCA RUBIN MEYER DORU & TRANDAFIR is one of the top law firms in Romania, offering professional legal support for the past 15 years. RMDT is part of Herzfeld & Rubin P.C., an internationally-known law firm head-quartered in the heart of Manhattan’s Financial District, having affiliated offices in New Jersey, Long Island, Israel and Myanmar. Always connected to the changing market, the firm provides a wide range of legal services for significant worldwide investors, with staff consisting of both Romanian and American attorneys. Leading international companies from the United States, Western Europe, Asia and the Middle East worked with RMDT as their professional legal advisers. RMDT also operates as regional counsel in the Balkans for several of its multinational clients who base their regional operations in Bucharest. This includes advice regarding Albanian, Bulgarian, Serbian and Moldovan legal issues.Our firm always starts its work with a deep understanding of our clients’ particular context and objectives, allowing us to offer the most suitable legal support. RMDT’s goal is to build strong partnerships with our clients

and provide the most pragmatic and tailored solutions to enhance their success. Furthermore, our firm’s long-term collaboration with global audit firms allows us to offer joint support to our clients. RMDT is particularly known for its capacity to identify solutions for clients and give its best efforts to achieve their anticipated results. The firm has always been driven by a proactive attitude, attention to detail, innovative approach, good insight, and thorough follow-up, depending on the particu-larities of the case.

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Chapter 18 143

Russia

Semenov&Pevzner Alexey Pereverzev

Ekaterina Smirnova

Russia


There are no mandatory pre-sale disclosure obligations. However, the CC of the RF stipulates a general obligation for parties to act in good faith when entering into talks on making a contract. In particular, provision by either party of incomplete or unreliable information, and non-disclosure of the circum-stances, which by virtue of the nature of a contract must be brought to the knowledge of the other party, shall be deemed unfair actions.


No. The rules for the commercial concession agreement shall be applied to the commercial subconcession agreement, unless the contrary follows from the specificity of the subconcession.


No, the format of disclosures is not prescribed by law or other regulation, and how often disclosures must be updated is not prescribed either. There is no obligation to make continuing disclosure.


This is not applicable in our jurisdiction.


A franchisor shall have an exclusive right to a trademark regis-tered within the territory of the Russian Federation.


In the Russian Federation a Russian franchise association exists (https://www.rusfranch.ru). This is a non-profit organisation



Under Russian legislation, a franchise contract is referred to as a commercial concession agreement (chapter 54 of the Civil Code of the Russian Federation, hereinafter – the CC of the RF).

The essence of the commercial concession in Russia is that by entering into an agreement, one party (the right holder/franchisor) undertakes to afford the other party (the user/franchisee) the right to use a whole range of rights (to a trademark (brand), brand book, slogans, design know-how, etc. – a system) for a certain remunera-tion. Transferring the right to use the trademark to the franchisee is a binding legal requirement to establish a franchising relationship.

Only persons engaged in business activities – commercial legal entities and individual entrepreneurs – can be parties to the agreement.


The CC of the RF regulates the offer and sale of franchises, namely chapter 54 and general provisions of Part 1 of the CC of the RF.


Yes, this person will be treated as a “franchisee” for the purpose of registration obligations. Russian legislation does not contain a minimum number of franchisees for a business to be recog-nised as a franchise.


Yes, a commercial concession agreement is subject to state regis-tration with the federal executive power body in charge of intel-lectual property matters – the Federal Service for Intellectual Property (hereinafter – Rospatent). Registration takes, on average, two to three months; submitting a certain set of docu-ments to Rospatent along with an application for registration and paying a fee are the requirements. The same applies to the amendment and termination of the agreement.


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Moreover, this law states that “vertical” agreements in writing shall be permissible if these agreements are contracts of commercial concession.

In particular cases, the restrictions on the rights of the parties to a commercial concession agreement may be recognised as invalid on the demand of the antimonopoly body or any other person concerned, if these conditions contradict the antimo-nopoly legislation in light of the conditions of an appropriate market and the economic position of the parties. However, these restrictions shall not extend to concerted actions of legal entities whose aggregate share in a commodity market does not exceed 20% and, with that, the share of each of them in the commodity market does not exceed 8%.


A maximum permitted term for a commercial concession agree-ment is not stipulated by law. At the same time, the term for which the agreement is concluded shall not exceed the effec-tive term of the right to the result of the intellectual activity or means of individualisation that were provided by the agreement.


No, there is no such term.


No. Moreover, a commercial concession agreement may provide for the obligation of the franchisee to sell, in particular to re-sell, commodities which are made and/or bought, to carry out works or render services with the use of the exclusive rights which the right holder has at the prices fixed by the right holder.


No. However, a commercial concession agreement may provide for the obligation of the right holder not to provide other persons with similar complexes of exclusive rights for their use in the territory assigned to the user or to refrain from his own similar activity in this territory.


A commercial concession agreement may provide for restric-tions on the rights of the parties to this contract; in particular, it may provide for:■ the obligation of the franchisee not to compete with

the franchisor in the territory to which the commercial concession agreement extends in terms of business activity carried out by the franchisee with the use of the exclusive rights belonging to the franchisor; and

■ the refusalof the franchisee toobtainunder a commer-cial concession agreement similar rights from competitors (potential competitors) of the franchisor.

created in 1997 in order to protect local franchise businesses and to create a more favourable legal and economic environment for the spread of franchising in Russia. Membership to this associ-ation is not mandatory, but commercially advisable.


No, membership does not impose any additional obligations.


The transfer of exclusive rights under a commercial conces-sion agreement shall be registered in Rospatent. In its turn, Rospatent requires that all documents including an agreement provided for a state registration shall be translated into the Russian language. That is why it is recommended to translate a commercial concession agreement into the Russian language.



Federal Law No. 57-FZ of April 29, 2008 “Procedures for Foreign Investments in the Business Entities of Strategic Importance for Russian National Defense and State Security” stipulates restrictions and control procedures in relation to foreign investments in strategic industries related, in particular, to state defence and security, using nuclear materials, informa-tion encryption services, space activities, aviation equipment, geological surveys, etc.


Franchisors typically choose limited liability companies as a form of business entity or act as individual entrepreneurs.


Before starting business activities in Russia, a legal entity or an individual entrepreneur shall be registered with the tax authority. A foreign organisation is subject to state registration with the tax authority as well.

3 Competition Law


Federal LawNo. 135-FZof July 26, 2006 “OnProtection ofCompetition” defines the organisational and legal measures of competition protection. This law excludes intellectual property issues from its regulation.


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Part 4 of the CC of the RF provides for the protection of copy-right. The objects of copyright are works of science, literature, and art regardless of the value and purpose of the work as well as of the mode of its expression. Copyright does not extend to ideas, concepts, principles, methods, processes, systems, means, solutions of technical, organisational or other tasks, inven-tions, facts, or programming languages. Russia is a member of the Berne Convention for the Protection of Literary and Artistic Works. Under Russian law, copyright protection can be expanded to Operations Manuals and software.

5 Liability


Russian legislation does not provide for mandatory disclosure obligations. However, other law mechanisms can be applied. For example:

Article 434.1 of the CC of the RF establishes a duty on those entering into contractual negotiations to act in good faith and not to enter into negotiations frivolously. If a party breaches the requirements of this article, it will have to reimburse the aggrieved party’s losses, which are defined as the expenses incurred by the good-faith party for the conduct of the nego-tiations and any expenses related to the lost opportunity to conclude a contract with a third party.

Also, Article 431.2 of the CC of the RF introduces the concept of warranties in connection with the conclusion, performance or termination of a contract and provides a remedy for breach of a warranty, entitling the aggrieved party to damages from the warrantor or, if stipulated in the contract, a penalty. If there is a breach of a warranty that is of substantial significance to the party who has relied on such warranty, such other party is also entitled to terminate the contract, unless the right to terminate has been expressly excluded.


The rules related to a franchise agreement apply to a sub-franchise agreement as well (Part 5 of Article 1029 of the CC of the RF). Thus, in case of sub-franchising, the master franchisee (as the franchisor in this agreement) is liable before the franchisee for disclosure non-compliance or for pre-contractual misrep-resentation. However, if the master franchisee’s breach of the sub-franchise agreement was caused by the franchisor’s actions, the master franchisee has the right to reimburse its expenses from the franchisor. The franchisor’s liability may be limited in the franchise agreement.

These covenants are enforceable in Russia. At the same time, non-solicitation covenants that prohibit employees from changing jobs during a certain period of time are against the law and are not enforceable.



In accordance with the CC of the RF, words, images, three-di-mensional designs and other designations or combinations thereof may be registered as trademarks. Trademarks are the subject of state registration with Rospatent. An exclusive right for a trademark is certified by a trademark certificate. The regis-tration of a trademark in the Russian Federation usually takes at least 12 months. A legal entity or an individual entrepreneur only may be the owner of an exclusive right to a trademark. The exclusive right to a trademark shall be effective for 10 years after filing the trademark state registration application and can be renewed an unlimited number of times.

Russia has signed: the Madrid Agreement Concerning the International Registration of Marks (1891); and the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (1989).


Yes, know-how (a manufacturing secret), confidential informa-tion and trade secrets are protected by Russian legislation.

Know-how is deemed to be information of any nature (produc-tion, technological, economic, organisational and others) about the results of intellectual activities in the area of science and technology and about the methods of carrying out professional activities that has a real or potential commercial value due to it not being known by third persons, which is not freely acces-sible to third persons on legal grounds, and the holder of such information must take reasonable measures aimed at keeping it confidential. A right holder of know-how obtains an exclusive right to it. It is possible to protect the Operations Manual as know-how.

Confidential information can be protected with a special regime – the trade secret (commercial secret) regime. Commercial secret means a regime of information confidentiality enabling its possessor under the existing or the probable conditions to increase revenues, to avoid unjustified outlays, to retain the posi-tion on the market of commodities, works and services, or to derive another commercial benefit. It is required to implement specific measures of protection in accordance with Federal Law No.98-FZofJuly29,2004“OnCommercialSecrecy”suchas:defining a list of information constituting a commercial secret; keeping a record of persons who acquired access to informa-tion; and affixing upon material media (documents) containing information constituting a commercial secret a “Commercial secret” stamp specifying the holder of that information. The main advantage of the trade secret regime is that it allows the possessor to bring criminal responsibility to an infringer for disclosure (industrial espionage).

Know-how can be protected with the trade secret regime; however, this is not strictly necessary.


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franchisee from taking certain actions (including use of the fran-chisor’s trademark and/or confidential information) during the period of the dispute consideration. However, satisfaction of the franchisor’s request for an injunction is very unlikely in practice.

Decisions of foreign courts on the application of interim measures (both preliminary and securing a claim) are not subject to recognition and enforcement in the territory of the Russian Federation, since they are not final judicial acts on the merits of the dispute, issued in adversarial proceedings.

As for the final decisions and orders of the foreign courts, a Russian court may refuse enforcement if such enforcement will contradict the public policy of the Russian Federation (the fundamental legal principles of its legal system).


Russia is a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards and international arbitration is generally used as a means of dispute resolution. The most commonly used arbitral rules are the rules of the London Court of International Arbitration (LCIA), International Chamber of Commerce (ICC), SCC (Stockholm), and International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the ICAC at the RF CCI, Moscow).

7 Real Estate


A typical length of term for a commercial property lease is one year with a right to an extension for another year and so on, or three- to five-year agreements.


Yes, the concept of an option/conditional lease assignment over the lease is understood and enforceable in Russia. The terms should be directly stipulated in writing in the body of a lease agreement between a landlord, franchisee and franchisor. If it is an option, a separate option agreement between a landlord and a franchisor is required.


The law prohibits foreign citizens, as well as foreign legal enti-ties, from acquiring land in the border areas of the Russian Federation and agricultural land. No other prohibitions that matter in a franchise context exist.


Yes, an entire agreement clause, a no misrepresentation clause and disclaimers, in general, are permitted and commonly used in practice. However, in case of a court dispute, the court will analyse the parties’ factual conduct in the process of pre-contractual negotiations as well and may establish that the franchisor in fact intentionally provided false information to the franchisee and the franchisor’s actions were in a bad faith. This may potentially become the ground for the franchisor’s liability and awarding the damages to the franchisee despite the clauses and disclaimers included in the agreement.


Russian procedural law, in general, permits class actions provided by the following conditions:1) there is a common respondent in relation to each claimant;2) the subject matter of the dispute is common or involves

homogeneous rights and legitimate interests of the claimants;

3) rights of the claimants and obligations of the respondent are based on similar factual circumstances; and

4) all claimants use the same way to protect their rights.Thus, class actions may potentially be filed by a number of

aggrieved franchisees in Russia; however, at present, it has never happened in practice.

Class action waiver clauses (such as the specific example of court protection waiver) are void and not enforceable under Russian law.

6 Governing Law


No, Russian law does not establish such requirement. As for the choice of governing law, there is no generally accepted norm and practice in Russia related to a choice of some particular law as governing; this issue is to be agreed by franchisor and franchisee in the particular agreement.

Under Russian law, since the parties do not agree the governing law in the franchise agreement, the law of the country in the territory of which the franchisee is allowed to use the complex of exclusive rights belonging to the franchisor, or, if this use is allowed in the territories of several countries at the same time, the law of the country where the franchisor’s resi-dence or main place of business is located, shall apply.


The franchisor may file a claim to a court requesting the prohibition of illegal use of any IP objects in breach of the franchise agreement. In order to prevent damage in a short period of time, the franchisor may also request for an injunction in the form of prohibiting the


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authorised party by way of notifying the other party about the termination (repudiation) of the contract. The contract shall be terminated as from the time of receiving the given notice, if not otherwise provided for by the contract. In the contract, parties can agree a specific period for giving a prior notice; for example, in six months before termination of the contract.



Russian legislation does not know the concept of a joint employer. However, it is important to ensure that a franchisee hires its employees independently and signs labour contracts on behalf of itself. If a franchisee sends its employees for training to a fran-chisor, it is recommended to formalise this as a separate contract for consulting services. Thus, it is recommended to separate legally the franchisee’s employees and the franchisor’s employees.


InaccordancewithArticle1034oftheССoftheRF,thefran-chisor shall bear subsidiary liability for the claims made to the franchisee for the inconsistency of the quality of goods (works, services) sold (performed or rendered) by the franchisee under the contract of the commercial concession. Against the claims made to the franchisee as the manufacturer of the products (goods) of the franchisor, the latter shall be liable jointly with the franchisee.

These provisions of the law are imperative, and parties cannot agree otherwise.

In all other situation parties are free to agree that, for example, a franchisee bears all liability for his employees’ actions and his relationship with the government.



Settlements in foreign exchange transactions shall be made by Russian franchisees through bank accounts with authorised banks.

In addition, Russian franchisees are obliged to ensure the return to the Russian Federation of funds paid to the franchisor for goods not imported to the Russian Federation (not received in the territory of the Russian Federation), work not performed, services not rendered, information and results of intellectual activity, including exclusive rights to them, not transferred by the franchisor, within the time period stipulated by the fran-chise agreements (Section 2 Part 1 Article 19 of Federal Law No. 173-FZ of December 10, 2003 “On Currency Regulation and Currency Control”).

In order to comply with the requirement of repatriation of funds, the franchisee shall provide the authorised bank with the information about the terms for execution of the franchisor’s obligations under the franchise agreement and the terms of return of the franchisee’s advanced payments.


The Russian economy has experienced the grave consequences of the COVID-19 outbreak. Of course, it has negatively affected the real estate market as well. The main tendencies amid COVID-19 for commercial tenants are the: reduction of rent; deferral of rent payment; and right to terminate unfavourable long-term leases.

Generally, landlords demand “key money” when signing a lease agreement to ensure execution of an agreement. A provision that provides an initial rent-free period is possible if parties agree to it.

8 Online Trading


In accordance with the CC of the RF, the terms of a commercial concession agreement providing for the franchisee’s obligation to sell commodities, carry out works or render services solely to the purchasers (customers) that are located or have their place of residence in the territory defined by the agreement shall be null and void.


It follows from the principle of contractual freedom that parties can agree an obligation of a franchisee to assign local domain names to the franchisor on the termination or expiry of a commercial concession agreement. In order to ensure a proper performance of this obligation, it is recommended to impose contractual penalties.

9 Termination


As a rule, parties of a contract are free to incorporate a provi-sion that grants a party the right to unilaterally terminate an agreement. However, in case of a dispute, the court may assess this provision of a contract for compliance with the principle of good faith and assess if this provision upsets the balance of powers. If so, this provision can be deemed void by the court.


In accordance with Article 450.1 of the CC of the RF, the right to unilaterally terminate a contract may be exercised by the


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actions on the instruction of the other party (principal) on his own behalf, but at the expense of the principal or on behalf and at the expense of the principal.

In commercial concession agreements, a franchisee acts on his own behalf as a separate entity and pays remuneration to the franchisor for granting a complex of exclusive rights, not for performance of any actions on the instruction of the fran-chisor. These two concepts can be potentially combined if the parties agree to do this to achieve a certain goal; for example, if a franchisee undertakes to attract new franchisees to a franchise system on behalf of the franchisor.



The CC of the RF provides a general rule that the following shall be deemed not admissible: the exercise of civil rights solely for the purpose of inflicting harm upon another person; actions in circumvention of the law for attaining an unlawful aim; and other wittingly unfair exercise of civil rights (the abuse of rights) (Article 10). If an abuse of a right has entailed a violation of another person’s rights, such person is entitled to claim for repair of the damage caused by it.

At the same time, the fairness of participants in civil law rela-tions and wisdom of their actions shall be presumed.

There is no separate provision for franchising, however the abovementioned regulation expands to franchising relationships as well.



No, only general provisions of chapter 54 of the CC of the RF.



There is no such disclosure obligation.


Article 1035 of the CC of the RF stipulates that the franchisee who has discharged his obligations properly shall have the right to conclude a contract of commercial concession for a new term upon the expiry of the validity term of the contract. When making a contract of commercial concession for a new term, the contract’s terms and conditions may be changed as agreed by the parties thereto.

It is also necessary to register the franchise agreement with an overseas franchisor at an authorised bank if the total amount of this agreement exceeds RUB 3,000,000 (approximately USD 43,000). If the total amount of the agreement exceeds RUB 200,000 (approximately USD 2,800), the authorised bank executes the payment only upon submission of the documents related to the execution of payment by the franchisee.


Royalties for use of IP objects paid to the overseas franchisor are subject to 20% profit tax unless an international treaty between Russia and the state of the franchisor’s jurisdiction provides otherwise. The amount of tax shall be withheld by the Russian franchisee as tax agent.

As for other payments typically made under a franchise agree-ment, as a general rule, they are subject to 20% profit tax or 20% VAT as well.

However, the granting of rights to use inventions, utility models, industrial designs, computer programs, databases, inte-grated circuit topologies, production secrets (know-how) on the basis of a licence agreement is not subject to taxation of VAT under Russian law (Article 149 of the Tax Code).

In terms of having a management services fee in place of a royalty, Article 149 of the Tax Code also includes the list of services, the rendering of which is exempted from VAT taxation. However, none of them are directly connected to franchising relationships. Thus, tax optimisation is possible, but it would be necessary to determine what specific services are included in “management services” in each particular case and whether these services comply with Article 149 of the Tax Code or not. Moreover, a management services fee cannot substitute a royalty in full since the subject of the franchise agreement shall include the transfer of the right to use the complex of exclusive rights and respective remuneration for it. Consequently, it would be necessary to separate remuner-ations for the transfer of the right to use the complex of exclu-sive rights and for the services rendered, and the relationships on rendering of services may also be agreed in a separate agreement.


Financial transactions shall be conducted in Russian rubles only if both the franchisor and franchisee are Russian currency resi-dents. If one party of the agreement is not a Russian currency resident, the payments may be conducted in foreign currency (Articles 9–10 of Federal Law No. 173-FZ of December 10, 2003 “On Currency Regulation and Currency Control”).



In order to be treated as somebody’s agent, a person (an agent) shall for remuneration undertake to perform legal and other


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obligation of the representee with respect to a representative or the persons on whose behalf or in whose interests the represent-ative acts, if such obligation is connected with the exercise of business activities, the representee may specify in the warrant issued to the representative that the warrant may not be revoked before the end of its duration or may be only revoked in the instances provided for by the warrant (irrevocable warrant).

The irrevocable warrant shall be certified by a notary and contain a direct indication of the possibility of its withdrawal.



Yes, electronic signatures are recognised as a valid way of creating a binding and enforceable agreement in Russia. Federal Law No. 63-FZ “On Electronic Signature” is applied. Under this law, the electronic signature forms a part of an electronic document that is intended to protect the document against forgery. The use of electronic digital signatures is permitted where their use is specified by agreement between the parties (Section 2 Article 160 of the CC of the RF).


Formally, the contract in written form can be concluded either by compiling one document, signed by the parties, or by way of exchanging electronic documents, transmitted via communica-tion lines that make it possible to establish for certain that the document comes from the party to the contract.

However, it is always recommended to store an original hard copy of a contract. In case of a dispute, the court may require a party to present an original of a contract for observation as evidence.



The Coronavirus pandemic has forced many franchise chains in Russia to cease their activities, and as a result to terminate many franchise agreements and to fire many employees. Franchises that could not be transformed into an online format or could not organise delivery of services at a distance became severely disrupted.

On the other hand, the pandemic brought an opportunity to transform businesses and make them more IT-oriented, to find new ways of supply, and to extend product lines.


If the franchisor has denied the franchisee the conclusion of a contract of commercial concession for a new term and within a year since the date of expiry of the validity term of the contract made with him has made a contract of commercial concession with another person, this granting the same rights as those granted to the user under the terminated contract and under the same terms, the franchisee is entitled to claim with the court either the transfer to him of the rights and duties under the contract made and reimbursement of losses caused by the refusal to renew a contract of commercial concession with him or solely the reimbursement of such losses.



Yes, the franchisor is entitled to impose on a franchisee an obli-gation to sell a franchisee’s company or assign shares in this company to a third person only after a prior written consent or notice of a franchisor of the franchisor’s overriding right to buy the franchisee’s business activities.


The commercial concession agreement may provide a provision that the franchisor is entitled to buy certain franchisee assets (e.g. equipment, shares in his legal entity) after termination of the agreement. This provision can be formalised as an option or as an obligation with a suspensive condition. A three-party lease agreement between a landlord, a franchisee and a franchisor may also provide an option for a franchisor to take a premise of a franchisee after termination of a commercial concession agreement. These steps will help to take over the ownership and management of the franchised business.


Yes, such power of attorney will be recognised by the courts. In accordance with Article 188.1 of the CC of the RF for

the purpose of discharging, or insuring the discharge of, an


150

Ekaterina Smirnova is the Managing Partner of the Saint Petersburg office of Semenov&Pevzner law firm.She graduated from the Law School of Saint Petersburg State University with a Bachelor’s and Master’s Degree majoring in civil law. She studied at Melbourne Law School and graduated with an LL.M. degree in the sphere of intellectual property. Ekaterina deals with consulting in the sphere of franchising and intellectual property/information technologies. In particular, she is experienced in: devising optimal legal framework for franchisor-franchisee relationships; drafting franchising agree-ments; drafting supporting commercial contracts for operational needs of the franchise network; legal assistance with the resolution of franchisee-franchisor disputes, including negotiations and litigation; and ongoing and strategic consulting. Ekaterina has extensive experience in representing companies in court as part of dispute resolution on franchising.

Semenov&PevznerOffice326,BaselBusinessCentre23LA Novgorodskaya Ulitsa, 191124Russia

Tel: +7 495 789 24 09Email: [email protected]: semenovpevzner.ru

Franchise 2021

Russia

Alexey Pereverzev is a Junior Associate at the Saint Petersburg office of Semenov&Pevzner law firm. Practising intellectual property law since 2018, Alexey joined Semenov&Pevzner’s team in July 2019 following the firm’s Saint Petersburg office opening. Alexey specialises in intellectual property and information technology law, franchising and personal data protection, taking part in the office’s work on advising and representing Russian and foreign clients. One of the main spheres of Alexey’s current professional interest is software law and games development regulation in Russia. Alexey has co-authored a number of practical articles related to legal aspects of software development in Russia.

Semenov&PevznerOffice326,BaselBusinessCentre23LA Novgorodskaya Ulitsa, 191124Russia

Tel: +7 812 984 54 01 / +7 960 236 59 31Email: [email protected] URL: semenovpevzner.ru

Semenov&Pevzner is a Russian law firm with offices in Moscow and Saint Petersburg. Our firm specialises in protecting intellectual property (including on the Internet) since 2006. Experts of Semenov&Pevzner also have extensive and varied experience in legal support of franchising. Among the firm’s clients are major record labels, brand owners, licensing agencies, software developers, advertising companies, international film companies, animation studios, web-shops and audio-system producers. For the last three years, Semenov&Pevzner has successfully represented its clients in more than 5,000 intellectual property disputes, including such companies as Domino’s Pizza and Cinnabon.

semenovpevzner.ru


Franchise 2021

Chapter 19 151

Saudi Arabia

Hammad & Al-Mehdar Law Firm Suhaib Hammad

Saudi Arabia


Yes, a franchisor is required to register:■ thefranchiseagreement(orthesub-franchiseagreement,

in the case of a master franchisee); pursuant to Article 3 of the Franchise Law implementing regulations; and

■ thetrademarkandanylicensedintellectualproperty.It should be noted that the franchisor shall register or apply to

register any trademark used for introducing the business model in Saudi Arabia before applying to register the franchise agree-ment (as per the Ministry’s form) and the statement of discourse with the Ministry.


Yes, the franchisor is under an obligation to register and submit a disclosure document to MOC before execution of the fran-chise agreement.

Documents which shall be attached along with the form to the Ministry are as follows:■ astatementofdisclosure;■ acopyofthedraftfranchiseagreement;■ acopyofthecertificationorapplicationforregistrationof

the trademark; and■ otherdocumentswhichmayberequestedbyMOCat its

discretion.


Yes, it is applicable to sales to sub-franchisees, and in this case the master franchisee is required to make the disclosure to MOC in accordance with the Franchise Law as if he were the fran-chisor for all intents and purposes.


Yes, it is described by the Franchise Law under a separate provi-sion. The Franchise Law makes it an obligation on the fran-chisor to inform MOC of any major updates to the previ-ously submitted disclosure letter, which was submitted during



The new Franchise Law defines the term “franchise” as: the rights granted by the franchisor to the franchisee to carry out the fran-chise business under the franchisee’s own account while under-taking the use of the IP and related trademarks of the franchisor whether with or without monetary compensation and is exclusive of the compensation paid by the franchisor to the franchisee.

Commercially, in the Saudi market, a franchise is consid-ered as a type of licence obtained by a party to allow them to have access to a business’s processes, trademarks and propri-etary knowledge to provide a service or sell a product under the party’s name (franchisor).


Franchises in Saudi Arabia have been subject to the requirements of the Saudi Commercial Agencies Regulations (promulgated by Royal Decree No. M/11 dated 1382H (1969G), as amended); in particular, the registration requirement.

The Saudi Commercial Agencies Law was not suitable for franchises and so in 2017, the Ministry of Commerce (“MOC”) issued a draft Franchise Law (the “Franchise Law”). The draft Franchise Law was promulgated by Royal Decree No. M/22 dated 9/2/1441 and came into effect in 2019, and its imple-menting regulations were issued in 2020. In addition, there is the Gulf Cooperation Council (“GCC”) Trademark Law. This law was approved by Royal Decree No. 51 of 25 May, and applies to the protection, registration and licensing of trademarks which may be offered as part of the offer and sale of franchises.


Yes, a single franchisee is considered a franchisee, is required to register as such with MOC, and must commit to the franchisee requirements set out by the Franchise Law.

Furthermore, a single franchisee can be appointed as a master franchisee in Saudi Arabia, and then, in the capacity of a master franchisee, the franchisee would sub-franchise to multiple sub-franchisees in Saudi Arabia.


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While the Franchise Law does not specify a full Saudi owner-ship requirement to the franchisor, it does, however, require the franchisor to be performing in Saudi Arabia for not less than a year and to be providing the services directly by it to be able to sub-franchise. Foreign companies must fulfil the licence require-ment by MISA and requirements set out under the Franchise Law, otherwise they cannot act as a franchisor in Saudi Arabia.


The most common form of business entity in Saudi Arabia is a limited liability company (“LLC”). The market is slowly moving towards establishing private Joint Stock Companieswhich are similar to corporations in other jurisdictions. As it stands, most local Saudi franchisors or master franchisees are established as LLCs.


In relation to general trading, a foreign-owned entity carrying out trading activities will be subject to the Saudi Foreign Investment Law (promulgated by Royal Decree No. M/1 dated 05/01/1421H (10/04/2000G), as amended) and its implementing regulations.

3 Competition Law


The applicable competition law in Saudi Arabia was issued by Royal Decree No. M/25 dated 04/05/1425H, as amended by Royal Decree No. M/24 dated 11/04/1435H. Saudi Arabia recently issued, on 29/03/2019G and pursuant to Royal Decree No. M/75 dated 29/06/1440H (07/03/2019G), its reinvigorated draft Competition Law to replace the existing Competition Law by the end of September 2019.

The Saudi Competition Law is designed to protect fair competition in the market and prevent dominant players from controlling the market and imposing unfair practices on consumers. The Competition Authority in Saudi Arabia is currently concerned with regulating the practices of manufac-turers and distributors of products in their dealings with sale outlets and consumers. We have yet to see a crackdown on fran-chisors or franchisees by the Authority. However, in theory, dominant players in the franchise industry are subject to the Saudi Competition Law and their activities must be carried out in compliance with the Law.


No, there are no limitations except that it should not be less than a period of five years.


No, there are no limitations for any related product supply agreement.

the disclosure to MOC and prior to execution of the franchise agreement.


Article 24 of the Franchise Law sets out a penalty not exceeding SAR 500,000 in case of non-compliance or breach of the provi-sions of the Law or its implementing regulations.

This is common in Saudi commercial laws where the relevant authority, in this case MOC, is authorised to assess violations and issue fines as it deems fit within the limits set by the relevant law, in this case the Franchise Law.


Yes, the franchise concept must already have been executed in markets for at least one year by two companies (one of which should be the franchisor); and the franchisor should have executed the franchise concept in at least two separate locations for a period not less than one year each.


No, it is not mandatory under the Franchise Law. However, it is always commercially advisable to join the business associa-tions and committees overseeing the franchise industry in Saudi Arabia to be informed of updates, and in the recent case to be able to provide input on the new draft Franchise Law.


No such obligations exist on membership of a national fran-chise association.


Yes, all documents submitted to governmental authorities in Saudi Arabia for the purpose of registering and disclosing the franchise must be translated into Arabic by a local certified translator and must be attested by the Saudi embassy/consulate in the jurisdiction of the franchisor.



Yes, any business owned fully or partially by a foreign investor will be subject to the foreign investment regulations issued by the Ministry of Investment of Saudi Arabia (“MISA”). Generally speaking, the restrictions imposed on non-nationals in respect of ownership and control are in relation to trading and wholesale activities.


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principles are looked to for support and guidance wherever possible, including Sharia principles, the Basic Law of Governance No. A/90 dated 27th Sha’ban 1412H which protects the privacy of individuals, and the Electronic Transactions Law issued under Royal Decree No. M/8 dated 8 Rabi’ I- 1428H (26/03/2007G) which regulates the exchange of electronic communication.

Generally, in the absence of applicable legislation, Sharia prin-ciples apply. Under Sharia principles, anyone’s right to privacy is protected and consent must be obtained for any disclosure of personal/confidential information, unless public interest requires its disclosure.


Copyrights are protected by the Copyright Regulation promulgated by Royal Decree No. M/41 dated 02/07/1424H (30/08/2003G) which came into effect on 22/01/1425H (14/03/2004G) and its Rules of Implementation published on 16/04/1425H (04/06/2004G). There is no procedure in place for copyright registration, because the law considers any published content protected once it is published in any media.

5 Liability


The franchisee can request damages from the franchisor for failure to commit to disclosure requirements in accordance with the Franchise Law.


The franchisor will need to comply with the disclosure require-ments. There are no limitations on the indemnity under the applicable laws in Saudi Arabia, except under Sharia doctrines which limit damages only to actual and proven suffered damages and losses. Parties seeking better protection and indemnity should consider making the agreement subject to a different governing law and jurisdiction.


Any disclaimer provisions not in line with the provisions of the Franchise Law are not acceptable.


The Franchise Law did not make reference to class action suits.


Generally, there are no restrictions imposed on the ability of a franchisor or master franchisee to impose minimum resale prices. It is commonly understood that franchisees need to provide a similar price range, in keeping with the franchise stan-dards; unless, of course, that franchisor is considered a domi-nant entity as defined by the Competition Law, in which case such practice may be considered as price-fixing by a dominant entity and thus may subject the franchisor or master franchisee to fines. That being said, we have not seen an active pursuit by the Competition Authority against franchisors and therefore the market practice is that franchisors should be able to set the pricing for the products or services as they deem fit, so long as such arrangements are commercially sound and reasonable.


No, the Franchise Law does not refer to any minimum obligations.


The courts accept non-compete and non-solicitation provisions as long as they are implemented in accordance with the applicable regulations. In practice, generally, the courts would not enforce unreasonable or burdensome covenants and the courts may, at their discretion, adjust the parameters of the covenant as they see fit. For example, periods may be reduced if they are in excess of five years. Courts in Saudi Arabia will take a case-by-case approach when enforcing an injunction granted by a foreign court but, subject to reciprocity agreements with other jurisdictions, the local courts may enforce such injunctions as they are without adjustment.



Trademarks are protected under the GCC Trademark Law. This law was approved by Royal Decree No. 51 dated 25/05/2014G. The law was enforced in September 2016 in Saudi Arabia. A trademark registration usually lasts for a period of 10 years and can be renewed by submitting a renewal application and satis-fying the renewal requirements. Failure to protect a mark in Saudi Arabia will deny the holder of the mark any rights under the applicable regulations.


Under the Protection of Confidential Trade Secrets Regulations issued by MOC’s Ministerial Resolution No. 3318 dated 25/03/1426H (04/05/2005G) and authorised by Council of Ministers Resolution No. 50 dated 25/02/1426H (05/04/2005G), know-how and trade secrets are protected from being illegally used by third parties. There are no specific data/confidential informa-tion protection laws in the Kingdom. As such, other regulations/


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a licence from MISA before opening any property. The Foreign Ownership of Real Estate Regulation (enacted by Royal Decree No. M/15 dated 17/04/1421H (19/07/2000G)) regulates foreign, non-GCC nationals’ ownership of real estate in Saudi Arabia.


Yes, an initial rent-free period is sometimes granted by the landlords in certain situations to allow the tenant to prepare the premises for the business. Such periods usually range from one to three months.

8 Online Trading


The Franchise Law does not cover antitrust issues. In the absence of regulation, the parties can agree on such language in the franchise agreement and it is at the commercial courts’ discretion to enforce such provisions in case of disputes.


No, ownership of domain names and trademarks can be trans-ferred from one party to another. This can be either by acqui-sition of the entity holding ownership of the domain name or trademark, or by assignment of such domain name/trademark to another party.

9 Termination


No, termination conditions of the franchise agreement are set forth in the Franchise Law.


No such local rules exist.


10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the

Class action suits are not uncommon in Saudi Arabia, as we have seen such suits in commercial fields (not related to franchise).

6 Governing Law


Yes, the Franchise Law imposes an obligation on franchise agree-ments executed in Saudi Arabia to be in compliance with the Franchise Law. However, there is no obligation on subjecting the agreement to local law or local litigation/arbitration. The key requirement is that the franchise agreement adheres to the Franchise Law in stating its terms and conditions.


It is possible to seek urgent injunctive relief from commercial courts in order to prevent a rogue franchise. The court will assess the claim on a case-by-case basis.


Yes, arbitration is a viable means of dispute resolution. Saudi Arabia acceded to the New York Convention on 19/04/1994. The most common arbitral rules in Saudi are the DIFC-LCIA Arbitration Rules.

7 Real Estate


No, it depends on agreement of the parties. The most common are one-year renewable lease agreements.


The option/conditional lease assignment over the lease is not common but can be done by inserting the relevant assignment provisions in the lease agreement.


Yes, there are certain limitations and non-nationals must obtain


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Yes, such obligation is imposed on franchisor and franchisee in the Franchise Law. The language imposes an obligation on both parties to commit to their obligations in good faith. In addition, the good faith obligation is imposed on the parties of a contract by the general principles of Sharia.



Yes, generally all applicable regulations will be applicable in one way or another. The money laundering regulations, the Competition Law, the Intellectual Property Law, the Environment Law and regulations issued by MOC will be the most relevant here to the franchise arrangement.



The same disclosure obligation imposed by the Franchise Law applies.


Article 15 of the Franchise Law addressed renewal of the fran-chise agreement. This includes an at least 180 days’ written notice by the franchisee to franchisor for its desire to renew the franchise agreement for a similar period and under the same terms. The Article also excludes incidents when such renewal is not applicable under the Franchise Law.


The franchisee is entitled to damages only in the case where the non-renewal is in violation of the provisions of the franchise agreement.



Yes, the franchisor is in a position to impose such restrictions in the franchise agreement.

franchisee’s employees? If so, can anything be done to mitigate this risk?

No, the franchisees employees will be under the franchisee’s sponsorship in accordance with the applicable labour law regu-lations and therefore the franchisor will not be regarded as a joint employer.


No, the franchisee will be liable for acts of employees under his sponsorship.



There are no such restrictions.


Yes, withholding tax is applicable at a rate of 15%. It is possible to structure the payments but parties need to make sure they do not cause suspicion or violate the applicable Anti-Concealment Law in Saudi Arabia. Should a franchisor choose to structure the royalties in a different manner, they could offer the fran-chise royalty-free and charge management fees and training fees instead, which are subject to a 5% withholding tax.


Generally, transactions conducted in Saudi are settled in Saudi Riyals. The banks accept inbound and outbound payments in other major currencies.



No, under the Franchise Law the franchisee will not be treated as the franchisor’s commercial agent. The parties can also add clear terms in the franchise agreement which set out that the franchisee is not an agent or representative of the franchisor. This contractual protection would be sufficient.


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(a) The electronic signature is the signature of the person identified in the relevant digital certificate.

(b) The electronic signature was provided by the person iden-tified in the relevant digital certificate for the purpose specified therein.

(c) The electronic transaction has not been altered since the electronic signature was affixed thereto.


While copies of electronically signed agreements are enforceable, it always advisable that original agreements are not destroyed. This is because governmental entities or the courts might request the original during the course of an application/dispute. It is still the practice in Saudi Arabia that digital scanned copies of wet-signed agreements are not considered originals for the purpose of taking legal action and enforcing their terms.

However, a duly e-signed document in compliance with the legal requirements for e-signatures, as described above, is considered an original and there is no need to have a “wet ink” version of the same duly e-signed agreement.



Like other places, the Kingdom has been greatly, commercially and economically, affected by the pandemic. This effect was a result of, among others, the temporary closure of govern-ment authorities and agencies during the curfew and lockdown periods. The MOC undergoes great challenges in handling a significant number of applications and requests. As a result, the Ministry has moved to provide many of its services online. This being experiential and new meant there were some bumps, especially in the beginning. As a result, it impacted franchising, especially in the past few months. The impact was on both new applications and existing ones that were either undergoing some issues or wish to terminate. While the Kingdom is over-coming and attempts to defeat the Coronavirus pandemic, we notably see a return of many businesses including franchising in the market. This return invites optimism and encouragement to many businesses to expand in the Saudi market, as we are witnessing these days and will continue in the upcoming weeks.


The Franchise Law does not make any reference to a “step-in” right. Such right may be agreed to under the franchise agree-ment and can be enforced. In the case of a local franchisor, there should not be any legal restrictions which prevent the fran-chisor from stepping in; however, in the case of a foreign fran-chisor, there are restrictions.


Yes, such power of attorney will be looked into seriously by the courts. If the power of attorney is issued outside Saudi Arabia, it needs to be attested at the Saudi Embassy in the place of execu-tion before further being attested at the Ministry of Foreign Affairs in Saudi Arabia.



Yes, electronic signatures are acceptable in Saudi Arabia. Saudi Arabia has issued its Electronic Transactions Law (promulgated by Royal Decree No. M/18 dated 08/03/1428H (26/03/2007G)). The Law is aimed at controlling, regulating and providing a legal framework for electronic transactions and signatures.

Requirements for applying e-signatures are provided for under Article 14(3) of the Electronic Transactions Law. They are as follows:


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Hammad & Al-Mehdar Law Firm

Suhaib Hammad joined Hammad & Al-Mehdar Law Firm in 2009. He earned his LL.B. from IIU Malaysia and his LL.M. from the University of Miami, specialising in International Business Law.As a Partner, Suhaib leads the Commercial and Intellectual Property practice, focusing on ICT, TMT and Life Sciences. In addition, Suhaib was placed on secondment with the corporate and commercial team at Simmons & Simmons in their Dubai and London offices, and has worked on leading cross-border transactions. His experience includes advising major international telecoms and healthcare companies on Saudi regulations in relation to formation and operation. Suhaib was also awarded a Client Choice Award by Lexology for the year 2019. The Firm was recognised as the best Mergers & Acquisitions law firm for the years 2017 and 2018 by the IFN Law Awards, and has been honourably mentioned as a Tier 1 Firm in The Legal 500 2017 for Banking & Finance Transactions.

Hammad & Al-Mehdar Law FirmKingRoadTower,L12,Office1209King Abdulaziz RoadJeddahSaudi Arabia

Tel: +966 920 004 626Email: [email protected] URL: www.hmco.com.sa

Hammad & Al-Mehdar Law Firm was founded in 1983 in Jeddah, Saudi Arabia, and has grown to become one of the most prominent private prac-tice Saudi firms in the Kingdom and the GCC. The law firm boasts a leading local presence supported by international capabilities.Hammad & Al-Mehdar provides a full suite of business and corporate legal services in all major areas of Saudi law, working on cutting-edge, complex and high-value transactions and disputes.Headquartered in Jeddah, Hammad & Al-Mehdar’s growth story is one of trade, innovation and technology in the Kingdom’s private sector. Hammad & Al-Mehdar maintains a strong specialisation in servicing privately held businesses, with unrivalled expertise in business and transaction

structuring, private construction works, commercial matters, intellectual property, corporate governance, and regulatory advisory services.

www.hmco.com.sa


Franchise 2021

Chapter 20158

Switzerland

Birgelen Wehrli Attorneys Dr. Jeannette Wibmer

Switzerland

■ TheSwiss Civil Code (‘CC’) under which there is a general legal obligation to act in good faith (Article 2 CC). From this result, e.g., mandatory pre-contractual disclosure obligations of the franchisor (see below) and manda-tory obligations of both contracting parties to treat each other fairly throughout their franchise relationship. Also ‘eternal agreements’ are not possible thereunder (Article 27 CC).

■ Swiss intellectual property laws, in particular the Trade Mark Act, the Designs Act and the Copyright Act (‘CA’) but also the CO protecting business and trade names of commercial ventures in Switzerland.

■ TheSwiss Unfair Competition Act, see question 3.1 below.■ The Swiss Act on Cartels and other Competition Restraints

(‘Cartel Act’), see question 3.1 below, as well as EU competition law, to the extent extraterritorially applicable also in Switzerland under its terms and recognised as a matter of the Swiss Conflict of Law Rules accepting such extraterritorial application under Article 19 Swiss Private International Law Act (‘PILA’) irrespective of the fact that Switzerland is not a Member State of the European Union.

■ The Swiss Data Protection Act, the Swiss Data Protection Ordinance as well as – to the extent extraterritorially appli-cable in Switzerland under its terms and recognised as a matter of the Swiss Conflict of Law Rules accepting such extraterritorial application under Article 19 PILA – the EU General Data Protection Regulation (‘GDPR’).


Under Swiss law, there is no difference between the appoint-ment of only one franchisee as opposed to such of multiple different franchisees by a franchisor. EU competition law and the EU GDPR may likewise become applicable in both cases alike (under Article 19 PILA).


There are no statutory authorisation or supervision rules governing franchise systems in Switzerland as such. However, various mandatory federal, cantonal and communal general provisions which regulate specific types of business activities and reserve them to people and bodies publicly authorised to



There is no statutory definition of the terms ‘franchising’, ‘fran-chise contract’, ‘master franchise’, ‘area development franchise agreement’, ‘local franchise agreement’ or the like. Also, only very few Swiss court decisions deal with franchise systems. In business practice, suitable definitions can, e.g., be found in the Ethics Code (Ehrenkodex) of the Swiss Franchise Association (‘SFA’). Under the SFA Code of Ethics, ‘franchising’ is defined as a ‘sales and distributions system under which goods and/or services and/or technologies are marketed whereby the franchisor grants a franchisee the right, and imposes the obligation, to conduct a business of a certain type or nature in accordance with the franchisor’s specific concept, know-how and continuing support in exchange for a direct or indirect financial consider-ation. In addition, a franchisee is typically granted a license (and contractu-ally bound) to use the franchisor’s intellectual property rights, such as busi-ness names, brands, logos, designs, get-up, etc. and the franchisor reserves its right to issue directives and to exercise a certain amount of control over the franchisee’s business activities’.


In the absence of Swiss statutory provisions which would directly govern franchising contracts, general rules of Swiss law appli-cable to all sorts of businesses are pertinent. Apart from public law provisions which impose, e.g., all sorts of mandatory insurance obligations, e.g., for a franchisee’s employees, and, of course, taxation, the following provisions are of particular relevance:■ TheSwiss Code of Obligations (‘CO’) and the related Federal

Court Decisions (‘FDC’) case law under which franchise agreements are characterised as a specific and unique kind of contract not yet standardised and, thus, judged on a case-by-case basis based on all specific circumstances of the particular case (FDC 118 II 157ff.). E.g. CO provi-sions made for lease agreements/partnership agreements could be relevant, and for more subordination like fran-chise agreements, the rules for agency contracts may apply. In an extreme case, an economically particularly weak and dependent franchisee who is strictly supervised and heavily contractually restricted by a single franchise agree-ment might even be re-characterised as an employee under the CO and would, as such, then profit from all sorts of mandatory CO provisions which protect such employees.


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■ the franchisor’s organisation and business activities,particularly with regard to the franchise system;

■ thefranchiseoffer(franchisepackage);■ thepotentialfranchiseeobligations(especiallyanestimate

of the necessary financial commitment);■ the franchise agreement and further agreements, guide-

lines and other terms relating to the franchising activity; and

■ alternativedistributionchannelsofthefranchisor,ifany,for contractual products or services.

This is not intended to be an exhaustive list. Rather, it is necessary to assess on a case-by-case basis, which information the franchisor must disclose in addition to the above before concluding a franchise agreement, in all specific circumstances of the particular case. As a result of the general and manda-tory legal obligation to act in good faith (Article 2 CC), further mutual and ongoing information obligations apply throughout the franchise term, if and when it is appropriate for either the franchisor or franchisee, based on specific circumstances which newly arise. The extent of all these information obligations may be controversial in some particular cases, so mutual informa-tion obligations should be contractually clarified in advance. In addition, it may be advisable for both a franchisor and a fran-chisee to include material information in the Annexes of the franchise agreement and to update them from time to time.


If the franchisor or franchisee breaches the pre-contractual information obligations and the negotiating partner has been led to act to its detriment by concluding a franchise agreement which it would have avoided if fully and correctly informed by the contracting partner about all relevant issues beforehand, the damaged party is entitled to withdraw from and thereby termi-nate the franchise agreement. The damaged party may also recover damages from the counterparty for all costs for contrac-tual payments made under the franchise agreement, such as (in case of a damaged franchisee): ■ investmentsmadeinthefranchisebusiness;■ lump-sumandmilestonepayments;and■ ongoingfranchisefeesforwardedtothefranchisor.

All net profits made by the franchisee with the franchise busi-ness must be deducted from such amounts. However, the fran-chisee may not argue that it has lost profits as a result of entering into a franchise agreement with one particular franchisor as opposed to another, which would have been more profitable based on all circumstances of the particular case.


There are no other franchise-specific legal requirements that must be met before a franchise is offered or sold, e.g. it is not required that a franchisor incorporates a subsidiary or sets up a branch within Switzerland or is domiciled here for tax purposes. However, various other mandatory federal, cantonal and communal general provisions must be observed which regu-late specific types of business activities (see above).


A Swiss Franchise Association membership may – although

exercise them must be observed by both the franchisor in its franchise business guidelines and by the franchisee in their exer-cise, e.g. for banking and insurance, healthcare, job agencies, casinos, etc. Wherever such professional licences are required, the potential franchisee must first obtain them before the fran-chise activities can be started.

In addition, under the Swiss Trademarks Act, there is an optional registration upon mutual agreement of both parties for any trademark licence included in a franchise with the Swiss Intellectual Property Office to make the trademark licence also enforceable against third parties. The process for registering a trademark licence is simple and involves submitting a copy of the trademark licence agreement for filing. Registering the licence agreement evidences the use of the trademarks, and therefore a claim cannot be made for non-use of the trademarks, even though it is the franchisee rather the franchisor using the trademarks in the country.


Under Article 2 CC there exists a mandatory pre-contractual obligation for the franchisor to disclose all important economic and legal information, in a true, fair and complete manner, for the consideration of the franchisee on whether to accept the franchise agreement or not. This must happen well before the signing of the relevant franchise. The franchisor must disclose any missing information which is not publicly accessible to the potential franchisee. Further details can be found in the SFA Ethics Code.

In particular, and not only during the current COVID-19 pandemic (see below, question 18.1), a franchisor willing to enter into a new franchise agreement with a Swiss franchisee is well advised to very diligently and adamantly adapt its franchise system to the prevailing circumstances, such as, e.g., the ‘new normal’ resulting from the COVID-19 pandemic, and in partic-ular to meticulously adhere to all mandatory rules and regula-tions applicable to it in Switzerland prior to signing as other-wise a Swiss franchisee may even have damage claims against the franchisor (see below, question 1.8).


Yes. If a franchisor appoints a master franchisee with the right to grant sub-franchises in the territory, then the master fran-chisee has a mandatory good faith disclosure obligation to its sub-franchisees under Article 2 CC for whatever material infor-mation the master franchisee is aware of as stated in question 1.5 above.


In the absence of statutory legislation, the SFA Ethics Code has stated the following minimum information the franchisor must always provide to the franchisee in writing at least 20 days before the signing of the franchise agreement:■ therelevantmarketinrelationtothefranchisebusiness;■ the products and services covered by the franchise

business;


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a subsidiary or to set up a branch in Switzerland. If the fran-chisor is willing to profit from this liberal Swiss business envi-ronment, either a company limited by shares (Aktiengesellschaft – ‘AG’) is chosen, or simply a branch of a suitable foreign fran-chisor entity, as this may be advantageous for tax reasons under applicable foreign taxation legislation. Franchisees likewise may either choose an AG, or sometimes, if funding is scarce, a limited liability company (Gesellschaft mit beschränkter Haftung – ‘GmbH’) or even only an entry in the Commercial Registry as a sole enterprise (Einzelfirma). Unless a GmbH will be treated as a ‘look-through entity’ for tax purposes in the franchisor’s jurisdiction and is, for this reason, desirable for the franchisor, a Swiss GmbH should NOT be chosen by the franchisor as it has various impracticalities.


In principle, there is no requirement for foreign entities to be registered in Switzerland prior to doing business here. However, the international and cross-border taxation issues should be carefully assessed by any foreign franchisor. As Switzerland is a party to over 80 double taxation treaties, the related tax optimi-sation potential may be considerable.

3 Competition Law


There are two different sets of competition law rules also appli-cable to franchise systems in Switzerland:■ The Swiss Unfair Competition Act, which, e.g., prohibits

surprising and unusual contractual clauses which do not regularly exist in contracts of a certain type, to the extent they are not properly brought to the attention of the other contracting party and understood by it well ahead of its contractual agreement. Thereunder, also all ambiguous terms and conditions are interpreted against their stipu-lator, which in a franchise system usually is the franchisor, and individually agreed contractual agreements preferable to general terms and conditions are imposed by one party only.

■ TheCartelAct,which,e.g.,sanctionsallcontractualprice-fixing (also by minimal or maximum price-fixing) or even price alignment by conscious parallel behaviour, any prohibition of mere passive sales, product tie-ins not justi-fied on the grounds of economic efficiency or suppressing effective competition. In addition, a Swiss court, if it has, e.g., jurisdiction under the franchise agreement, may also apply EU competition law rules applicable to fran-chises irrespective of a Swiss choice of law in the franchise agreement, if such EU competition law rules consider themselves applicable also in Switzerland as a non-EU member country and, furthermore, Swiss law recognises the foreign legislation purpose at issue as justified (Article 18 Swiss PILA). Additionally, EU competition law may also be pertinent to the extent that it is extraterritorially applicable in Switzerland under its terms and recognised as a matter of Swiss Conflict of Law Rules accepting such extraterritorial application under Article 19 PILA irrespec-tive of the fact that Switzerland is not a Member State of the European Union.

not mandatory – be helpful to better prepare the entry into the Swiss market for both the franchisor and the franchisee, as there exists not only a different legal framework here, but also further country- and even region-specific features, such as diverse mentalities and consumer preferences. There are also four different languages which make Switzerland an ideal test market for international franchise operations. With its four national languages, Switzerland as a test market may even open the door to France, Germany, Austria and Italy as directly adja-cent countries.


The SFA is a typical professional service association, i.e. it aims to help its members to adhere to the best practices in the industry. An SFA membership is thus an opportunity and not a burden.


No, and it is often also not necessary from a business perspec-tive as German, French and Italian are the official languages in Switzerland, and a good command of English is quite common as well. However, it is highly advisable for franchisors to check well ahead of the franchise agreement’s conclusion to what extent the franchisee understands the contractual terms in prac-tice and – if there are doubts – to have them translated and such translation checked by a Swiss lawyer beforehand. Otherwise, a franchisor risks that contractual terms which the franchisee did not properly understand will not be applied at all or at least be interpreted against the franchisor as author of the franchise contract in case of a dispute.



No, not yet, so far local and foreign investors are treated alike in Switzerland. In particular, the only restriction on non-nationals in respect of the ownership or control of a busi-ness in Switzerland is that the Swiss entity needs one authorised sole signatory resident in Switzerland, or two such signatories if they are only authorised to sign collectively.

Like the EU, Switzerland saw no need for investment controls for decades. However, as the European Union ‘Ordinance on the Verification of Foreign Direct Investment’ (valid from October 2020) was issued in 2019, a parliamentary motion was launched in the Swiss parliament advocating investment controls in Switzerland as well. Thus, in light of the rising trade wars between foreign countries, it may not be guaranteed that the absence of foreign direct investment regulation will continue in Switzerland in the future.


As mentioned above, a franchisor does not have to incorporate



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circumstances of the particular case (Article 340a (1) CO) and, on top of this, only if adequate compensation is paid.



Under the Swiss Trade Mark Act, any graphically representable sign can be protected if registered, including words, letter combi-nations, number combinations, images, three-dimensional shapes, slogans and series of tones or colours. Unlike in many other countries, usually only registered trademarks receive protection in Switzerland, i.e. whoever only uses a trademark in commerce here without also registering it will risk losing its rights to the owner of a later deposit of the same trademark! Foreign trademarks which are well-known in Switzerland could, in theory, receive the same level of protection without registra-tion. However, the burden of proof for the well-known char-acter of a foreign trademark lies with its owner alone.

To avoid any uncertainty, we thus strongly advise franchisors to always effectuate trademark registrations in Switzerland prior to starting their franchising here. Irrespective of a registration, the protection of a trademark can be cancelled if it has not been used for a period of five years. In all other cases, trademarks can be renewed by simply paying the related renewal fee due at each 10-year anniversary of registration or renewal. Finally, it is beneficial to be further assessed on whether a Swiss trademark licence included in a franchise agreement should be registered with the Swiss Intellectual Property Office or not (see above, question 1.4).


All relevant business information which is not obvious, not generally known and not easily accessible is protected under Swiss civil, criminal, administrative and procedural law provi-sions. For franchisors it is important to be aware that there is no formal process to seek protection for trade secrets, i.e. franchise businesses are well advised to take additional organisational and contractual measures to protect their business secrets through suitable means such as, e.g., the restriction of access on a need-to-know basis, as well as entering into strict confidentiality and non-disclosure agreements with their franchisees.


The CA protects, e.g., works of literature, music, pictures, titles, characters, works of applied art, letters, diaries, photographs and audiovisual works as well as computer programs, only as a result of their ‘unique character’. Franchise operation manuals and proprietary software may thus profit from such copyright protection as well. In the absence of a copyright assignment, only the natural person who created the copyright-protected work is regarded as the author who profits from copyright protection. Only software is directly owned by the employer, i.e. not the employee creating it (Article 17 CA), and such employer is often a legal entity.


There is no specific limit for contract durations under Swiss law. In cases of a long amortisation of the investment of either party, it is not unusual to have a contractual term of 10 years or – in exceptional circumstances – even longer, and to foresee that the contract duration even continues beyond that if neither party terminates the contract with, e.g., six months’ prior notice as of then (see also question 3.3).


The only legal barrier for franchise agreement terms is Article 27 CC: thereunder, a very long contractual term may – based on all circumstances of the particular case – be characterised as over-restrictive. Again, all circumstances of the particular case are to be taken into account. For example, the Federal Supreme Court once held that a beer supply agreement duration was invalid as it was longer than 20 years (FCD 114 II 159ff.). However, only a few years later in another, non-published case, a beer supply agreement was found as acceptable, even though the agreement was for 30 years.


Article 5 of the Cartel Act prohibits contractually binding minimum prices. Switzerland traditionally has among the highest price levels in the world, i.e. franchisees could not cover their costs for wages, rent, etc. if they are selling franchise goods or services too cheaply.


There is no statutory legislation or court practice requiring a franchisee to be given a specified contractual territory. However, it is perfectly legal for a franchisor to contractually allocate a specific territory on an exclusive or non-exclusive basis to a fran-chisee. Thereby, intra-brand competition between franchisees in adjacent territories may also be intensified, as passive sales by other franchisees may not be prohibited under the Cartel Act. The same also applies under EU competition law to the extent extraterritorially applicable in Switzerland and recognised to be so under Article 19 PILA in Switzerland, despite the fact that Switzerland is not a member of the European Union or the European Economic Area.


During the franchise agreement term, a contractual non-compete obligation of the franchisee is valid and enforce-able. A post-contractual non-compete clause must be agreed upon and is only valid to the extent that it is not too restric-tive for the franchisee. Upon termination, it is only valid if the franchisee indeed profited from valuable business know-how or business contacts of the franchisor (Article 340 CO by analogy), must be adequately limited in time, scope and territory in all


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would not have concluded or continued the franchise otherwise. More details can be found in the answer to question 1.8 above. Alternatively, the franchisee can uphold the franchise agreement but will require its terms and conditions to be renegotiated.

6 Governing Law


Franchise systems in Switzerland may have a foreign law appli-cable to the franchise agreements, and a contractual choice of law is in general valid, if not imposed in bad faith. However, to the extent that, e.g., the lease of the premises is involved, the lease and the real estate located in Switzerland will mandato-rily be governed by Swiss law irrespective of the law applicable to the contract. In addition, the Swiss legal environment is a favourable one for franchising agreements, as Swiss law contains far fewer restrictions than many other legal systems. In inter-national business relationships, Swiss law is also regarded as well-balanced and ‘neutral’ in the sense of serving the interests of both contracting parties on the basis of all relevant circum-stances of the particular case. If both a master franchisee and a sub-franchisee are in Switzerland and the sub-franchise is only within the Swiss territory, the ‘international element’ required as a prerequisite for a valid choice of a foreign law may be regarded as missing in the circumstances of the particular case under the PILA, i.e. a foreign law may then not be validly chosen for the contract between the master franchisee and the sub-franchisee.


Injunctions are available and will be enforced if made by the competent court under the franchise agreement. However, they are only interim measures, i.e. must subsequently be confirmed in ordinary proceedings. Such interlocutory orders can also stop damaging actions of a franchisee but not remedy its inac-tion as specific performance acts can only be enforced in ordi-nary proceedings.


Arbitration is recognised in Switzerland as the preferred dispute resolution mechanism for international agreements, and Switzerland is a signatory to and has ratified the New York Convention in 1965. Foreign arbitral awards of another state which has also ratified the New York Convention can be enforced in Switzerland. The grounds for objecting to enforcement of a foreign arbitral award under the New York Convention are similar to the objections which can be raised under PILA against the enforcement of a foreign judgment. Furthermore, Switzerland is one of the leading arbitration hubs of the global business world, even for international agreements with no business relationship

5 Liability


If the franchisor fails to disclose material information to the franchisee, which is relevant to the franchisee’s decision to enter into or to continue the franchise, the franchisee may termi-nate the agreement and demand damages if it can prove that it would not have concluded or continued the franchise otherwise. More details can be found in the answer to question 1.8 above. Alternatively, the franchisee can uphold the franchise agreement but will require its terms and conditions to be renegotiated.


The franchisor is responsible for providing the master franchisee with all necessary knowledge, and in particular with the neces-sary know-how, as well as to comply with its pre-contractual and ongoing disclosure obligations (see question 1.5 above). The franchisor cannot validly waive its related liability for fault and gross negligence. The same applies for the franchise agreement between a Swiss master franchisee (and sub-franchisor) with its Swiss sub-franchisee. If the master franchisee becomes directly liable to a sub-franchisee for an infringement of this pre-sale or ongoing information disclosure obligation, then the master franchisee can seek indemnification from the main franchisor if, and only if, to the extent such main franchisor did not comply with its related pre-contractual or ongoing information obliga-tions to the master franchisee beforehand, the master franchisee could not pass such information on to the sub-franchisees as a result. In all other cases, the sub-franchisee will have to turn to the master franchisee and sub-franchisor instead, i.e. not to the main franchisor (under the assumption that there is no direct contractual relationship between the main franchisor and the sub-franchisee).


No, the liability of the franchisor for gross negligence or unlawful intent regarding the infringement of its pre-contractual or ongoing information obligations cannot be validly excluded even if a foreign law would otherwise govern the franchise agreement between the franchisor and the master franchisee.


If the franchisor fails to disclose material information to the franchisee, which is relevant to the franchisee’s decision to enter into or to continue the franchise, the franchisee may termi-nate the agreement and demand damages if it can prove that it



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significantly cheaper. In city centres, key money and full refur-bishments at the cost of the tenant are customary, whereas in remote mountain or rural areas (away from touristic hotspots like St. Moritz, Gstaad, Interlaken, etc.) tenants can be in a better bargaining position.

8 Online Trading


No; online distribution upon receipt of a non-solicited order is regarded as a passive sale which is mandatorily always allowed under the Cartel Act. Additionally, EU competition law may prohibit such a clause to the extent that it is extraterritorially applicable in Switzerland under its terms and recognised as a matter of Swiss Conflict of Law Rules accepting such extraterri-torial application under Article 19 PILA irrespective of the fact that Switzerland is not a Member State of the European Union.


No. To the extent the franchisor also profits from trademark protection for the domain at issue, there is also a fast and effi-cient domain name dispute resolution procedure outside the ordinary courts for ‘.ch’ domains with the World Intellectual Property Organisation in Geneva.

9 Termination


Pursuant to the leading case FDC 118 II 157ff., a franchisee’s claims for compensation may be admissible in the case of an improper or abusive extraordinary termination by a franchisor. Long-term agreements like franchises may only be extraordi-narily terminated for good cause (Wichtiger Grund ), if and to the extent their continuation becomes intolerable for the termina-tion party. Any enumerations of good causes in the franchise agreement serve only as an indication as to what the contracting parties deem intolerable, i.e. are not exhaustive for the court.


No; however, if a franchise is terminated without ‘good cause’ by a franchisor, the franchisor may become liable to compensate the franchisee for the damage caused to the franchisee by such franchisor termination.

to Switzerland. Arbitration in Switzerland or with Swiss parties in a dispute is often chosen to be governed by the ICC Rules of Arbitration or by the Swiss Rules of Arbitration. Proceedings under the Swiss Rules of Arbitration can be heavily assimilated into common law court procedures under terms of reference to be mutually agreed upon by the parties (i.e. with the cross-ex-amination of witnesses, etc.), whereas ICC Rules of Arbitration proceedings are usually more similar to civil law proceedings, i.e. more arbitration-panel-controlled and, thus, faster. In general, arbitration proceedings are easier to serve than foreign court proceedings and more confidential, so overall often recom-mended on an international level.

7 Real Estate


There is no typical duration for a commercial property lease and lease agreements. Instead, leases are normally customised to ensure that they run in parallel with the duration of the fran-chise agreement.


A right of the franchisor to step into the franchisee/tenant’s shoes under the lease, or to direct a third party (often a replace-ment franchisee) to do so upon the failure of the original fran-chisee/tenant is, in principle, only enforceable against the lessor with its advance consent to such step-in or replacement (or the termination of the franchise agreement). However, even in the complete absence of an advance consent by the real estate owner/lessor to accept the franchisor or its assignor as a new tenant in the lease contract of the franchisee, the lessor would only be legally entitled to refuse further assigns of the fran-chisor/assignor as such new tenants, if the lessor had ‘important reasons’ to do so in the sense of Article 263 CO.


Commercial real estate is currently not subject to any such restrictions.


The Swiss commercial real estate market varies sharply from region to region. While commercial real estate property in cities like Basel, Berne, Geneva, Lausanne, Lucerne, Zurich, etc. is expensive, commercial real estate in rural areas can be


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No, there are no requirements for financial transactions to be conducted in the local currency.



Under Swiss law, the franchisee is not normally treated as an agent. However, under special circumstances, franchisees can be re-characterised as agents if the franchisee is integrated into the franchisor’s sales organisation and is required to transfer its customers to the franchisor at the end of the franchise agree-ment. In such cases, a franchisor may be held liable to pay the compensation for the income losses of the franchisee as a result of the franchise termination (by analogy to Article 418u CO). This risk can be restricted by excluding any obligation of the franchisee to disclose any customers to the franchisor.



As mentioned, there is a general legal obligation to act in good faith (Article 2 CC), e.g. mandatory pre-contractual and ongoing disclosure obligations of the franchisor (and the franchisee) as well as mandatory obligations of both contracting parties to treat each other fairly and reasonably throughout their franchise relationship.



In the absence of Swiss statutory provisions which would directly govern franchising contracts, general rules of Swiss law applicable to all sorts of businesses are pertinent also for the ongoing relationship issues (see above, question 1.2).



As a result of the general and mandatory legal obligation to act in good faith (Article 2 CC), mutual information obligations also apply upon renewal if and when specific circumstances newly arise beyond what either party already knew before-hand as a result of its operation of the franchise as franchisee or franchisor.



There are cases where franchisees may be recharacterised as employees (see above) and will then profit from the mandatory provisions of the CO for their protection. Under the applicable Swiss social security legislation, franchisees may also be classi-fied as pseudo-self-employed whereupon social security contri-butions will become due by both the franchisee and the fran-chisor in analogy to normal employment relationships. To mitigate these risks, it is important for a franchisor to not too closely instruct, monitor and correct franchisees in their daily business, i.e. to grant them a certain freedom to pursue it as they deem fit.


Under Swiss law, a franchisor may become directly liable under the Cartel Act for acts or omissions of its franchisees, if such acts or omissions are foreseen as contractual obligations in the franchise agreement despite being contrary to the Cartel Act (e.g. if passive sales were prohibited or prices fixed; see above).



No, there are no restrictions on the payment of royalties to an overseas franchisor. It must be noted, however, that it can be very beneficial for a foreign franchisor to agree on Swiss franc payments by its Swiss franchisee, as the Swiss franc has been for decades and still is one of the strongest currencies in the world, even now during the COVID-19 pandemic.


No, Switzerland is one of the few countries which does not impose any withholding taxes on royalties. However, foreign franchisors which incorporate a subsidiary in Switzerland should be aware of the 35% withholding tax, especially with regard to distributed dividends. However, through an exten-sive network of double taxation treaties, this tax burden can be partly or wholly reduced.



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a franchise migration under pre-emption or “step-in” rights, will such a power of attorney be recognised by the courts in the country and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?

Powers of attorney are not common in Switzerland in this respect as they may, in an extreme case, even validly be unilat-erally withdrawn with immediate effect and additionally require public notarisation in all cases involving the transfer of real estate. Instead, it is highly recommended for both franchise parties to contractually agree in advance on such pre-emption or step-in rights.



Under the Swiss Electronic Signature Act, an electronically signed document with a so-called qualified electronic signature can, since 2003, be used as an alternative to a handwritten signa-ture. The electronic signature must be based on a valid Swiss electronic signature certification when it is issued. Qualified electronic signatures are visible on documents, usually on a signature line or block. You can check their validity directly in Adobe Acrobat Reader or through the federal online service (www.e-service.admin.ch/validator).

In theory, no particular form is required for a franchise agree-ment under the CO, i.e. not even the written form. For evidence purposes it is, nevertheless, highly advisable to put all franchise terms and conditions in writing, to initial a printout of the fran-chise agreement on each page, and to sign it by hand on the signature page. In addition, a foreign franchisor must check the Swiss Commercial Registry for the signature rights of a Swiss counterpart; in Switzerland, it is quite common even for C-level representatives of a Swiss company only to be entitled to sign jointly, i.e. not alone, as can be seen in their commercial registry entry as signatories.


Under Swiss company law, a Swiss business is only required to keep its business files electronically, i.e. it is perfectly fine for the Swiss company to keep any signed originals as a PDF copy only. However, if a counterparty later claims that the electronic version is a fake or has a fake signature, then it may be helpful to have a signed original in storage, with the help of which the authenticity of the signature can be proven for evidence purposes. In addition, original signatures or even deeds may be required in the jurisdiction of the foreign franchisor or under a foreign law chosen by the parties to govern their franchise agreement.


Under the freedom of contract of Swiss law, franchisees are not automatically entitled to a renewal or extension of the fran-chise when the franchise expires. Under certain circumstances, a franchisor which has a particular dominant position may be forced to renew a franchise agreement with a franchisee under the Cartel Act.


Pursuant to the leading case FDC 118 II 157ff., a franchisee’s claims for compensation may be admissible in the case of an improper or abusive extraordinary termination by a franchisor. Likewise, compensation may be due if a franchisee is contractu-ally bound to disclose its clients to the franchisor upon termina-tion (Article 418u CO by analogy).



A transfer of the franchise agreement by the old franchisee to a new franchisee requires the approval of the franchisor, i.e. a franchisee cannot simply get rid of its contractual obligations by selling the franchise business to a third party. It is also not unusual to contractually foresee that a franchisee needs prior written approval from the franchisor for a change of control within the franchisee entity.


If the franchise requires the franchisee to acquire real estate or to directly enter into a lease agreement, the franchisor’s right to take it over upon termination of the franchise agreement must be secured. Contracts confirming the right to purchase real estate require a notarised deed to be valid. The purchase right or option may also be registered in the land registry to make it enforceable against third parties. If the franchisee is only the lessee of the business premises, the approval of the lessor is required for a franchisor to enter into the lease (see above) as a result of which the franchisor is recommended to address this issue with the lessor before the conclusion of the franchise agreement.

16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete


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compulsory Swiss unemployment insurance, which covers between 70% and 80% of the former salaries of employees who lost their job during the pandemic. Again, pre-existing franchisor and franchisee employers may like-wise profit from those in favour of their employees. In Switzerland, such employees must often NOT even be terminated, because their employers may profit, on top of unemployment insurance payments to employees upon termination, also from so-called short-term work benefits covering temporary non-employment claims of employees otherwise remaining with the business. Employers who do not need the work of their employees as a result of the pandemic may cover between 70% and 80% (in case of zero work obligation of their employee) of their former salaries by Swiss short-term work benefits, provided the employers agree to continue to pay Swiss social security insurance contributions for them. The period allowed for placing employees on such short-time work was raised from 12 months to 18 months from September 1, 2020 onwards.

■ Apart from the above financial support for businesses(hardship loans) and the easement (unemployment insur-ance payments) and prevention of unemployment (short-time work benefits at firms), specific business sectors like, e.g., event management, the aviation industry and the sports sector have also so far received emergency relief payments and further such emergency relief payments are expected for other sectors as well as the need arises.

■ The Swiss federal government also implemented a planto offer additional loans totalling up to CHF154 million especially for existing start-up companies together with the Swiss cantons, in which the start-ups are located. However, these are only available if the respective cantons decide to participate in this federal plan as well. Also, from these start-up loans franchisees and franchisors in Switzerland can profit alike, provided they were already in existence before the pandemic.

■ Swiss employershitby thepandemicwill in additionbeable to defer payment of compulsory Swiss social security contributions temporarily and without interest.

■ TheSwiss federal government is finally throwing a life-line to Swiss businesses threatened by bankruptcy. Firms can delay declaring their financial difficulties to the bank-ruptcy courts.

As a result of all of the above measures, Swiss unemployment so far only rose to between 3% and 4% and a Swiss business illi-quidity and bankruptcy wave could be avoided altogether. Thus, the Swiss economy remains stable and is even fit to grow again back to where it was prior to the pandemic. Thus, it offers excel-lent conditions also to franchise systems either already active here or willing to become so in the future.

To those franchise systems already active here, finally the legal concept of ‘clausula rebus sic stantibus’ for Swiss law-governed long-term franchise agreements is of importance: franchise systems, for which the circumstances of the particular business or revenue model on which the related franchise agreement is based have changed substantially and in a manner unforeseeable for the contract partners as a result of the COVID-19 pandemic, have to be adapted to the ‘new normal’ by negotiations in good faith should either of the contract partners require them to be so.

In integrated distribution systems, we strongly recommend that the franchise system supplier is well advised to make adap-tations to its concept in the short term and possibly for a limited period of time where possible and to implement them quickly.



From a Swiss perspective, the greatest threat to franchising and business in general from the Coronavirus pandemic is the fact that in various countries, even in some of global economic importance, it has not yet been possible to control the pandemic which has led to international travel, transport and supply chain restrictions. This is in contrast to Switzerland, where a tempo-rary shutdown together with strict restriction measures imple-mented by the Swiss federal government had a dramatically positive impact on flattening the COVID-19 infection curve. This has allowed the Swiss authorities to ease measures step by step, which already started in mid-May.

As of today, Swiss business life is back to a ‘new normal’ char-acterised by strict social distancing in public places, compul-sory mask-wearing on public transport, in hospitals and the like, combined with a strict ‘track, trace & isolate’ policy with regard to COVID-19 infections. Even public and private events of up to 1,000 people may be allowed again, if COVID-19 protection concepts are in place and contact tracing is guaranteed in case of resulting infections. Only larger events are still banned as of today. In addition, cantons may impose stricter measures, should infection rates rise again in certain places. Some cantons, including Geneva, Basel and Ticino, have already done so, e.g., by introducing stricter restrictions on gatherings than in the rest of the country, e.g., also in Zurich, mask wearing in shops.

To ease the COVID-19 pandemic burden for both Swiss employers and employees alike, the Swiss federal government and later also the Swiss federal parliament as well as the Swiss cantons quickly started to also offer very substantial monetary relief to Swiss employers and employees alike (franchisors and franchisees may also benefit from these in Switzerland to the extent they are incorporated (in case of legal entities) or resident (in case of natural persons) there):■ TheSwissfederalauthoritiessetasidemorethanCHF65

billion (for a population of roughly 8.5 million inhabi-tants only) by way of government emergency ordinances to support the restart of the Swiss economy after a tempo-rary standstill of many business activities from mid-March toMid-June2020asaresultof the temporary lockdownof schools, various retail businesses, such as shops other than food shops, restaurants, and events of all sorts, and a government recommendation for the whole Swiss work-force to work from home, whenever possible.

■ At the beginning of April 2020 already, an economicsupport package of CHF40 billion was put in place by the Swiss government. This consists of emergency zero interest term loans in favour of struggling Swiss compa-nies and other businesses for up to seven years. These loans are available through the normal Swiss house banks of Swiss businesses and benefit from repayment default guarantees by the Swiss government. Their goal is relief for liquidity problems and, pursuant to a recent amend-ment thereto, these bank loans may even be used for investments, i.e. also allow businesses, including existing franchise systems, to make the necessary adaptions of their business and revenue models to the abovementioned ‘new normal’.

■ InMay 2020, the Swiss federal government also agreedto an additional CHF14.2 billion in financing for the



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On the one hand, this is absolutely necessary depending on the field of franchise activity in order to enable the franchise busi-ness to simply continue to operate and exist in Switzerland. On the other hand, it may even be compulsory under mandatory Swiss general contract law provisions governing a particular franchise agreement, as those would otherwise enable the fran-chisee to simply extraordinarily and validly terminate the fran-chise agreement and even claim damages from the franchisor as a result. Franchisors have an obligation to provide and main-tain the use of their franchise systems for the benefit of their franchisees/contractual partners. The more integrated a fran-chise system is, the higher the threshold of the duty of care of the franchise system provider will be in this respect. Not taking actions to adapt to the ‘new normal’ or refusing amendment negotiations is therefore a non-starter from the outset for all franchise agreements governed by Swiss law.


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Dr. Jeannette Wibmer LL.M. (LSE) is an attorney-at-law and partner at Birgelen Wehrli Attorneys. With over 20 years in private practice as an international business lawyer, Jeannette is fluent in English, German, French and Italian, serving corporate clients, entrepreneurs and high-net-worth individuals, mainly in the pharmaceutical, life science, IT, media and energy industries, the green economy and other high-tech and services industries; e.g. for the commercialisation of innovative developments and products through joint ventures, technology transfer arrangements, licensing, franchising, distribution and other alliances; venture capital and growth financings for medium-sized companies by means of private equity transactions, group debt financings, project financings, IPOs and other capital market transactions; and M&As including due diligence examinations, real estate acquisitions, tax-driven corporate restructurings, corporate governance and compliance as well as succession planning.

Birgelen Wehrli AttorneysZollikerstrasse 27, PO BoxCH-8032 ZurichSwitzerland

Tel: +41 44 386 64 00Fax: +41 44 386 64 01Email: [email protected]: www.bwr-law.ch

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Switzerland

Birgelen Wehrli Attorneys is a Swiss international business law firm, whose origins date back to 1893. Our independent and entrepreneurial partners have many years of private practice experience and efficiently advise you with a strategic, commercial, contract and intellectual property law perspective. We represent your interests for the legal optimisation of your everyday challenges in your business relationships and also assist you in coping with crisis situations, including litigation in Switzerland and abroad. We advise companies and their owners, mainly in the IT, life science, high-tech, trade and energy industries as well as in the green economy and non-profit organisations. Our law firm is well connected throughout the world. Long-established alliances with leading foreign law experts in their

foreign jurisdictions enable us to serve our clients across borders. All lawyers at Birgelen Wehrli Attorneys are multilingual and we are able to advise you in German, English, French, Italian and Spanish.

www.bwr-law.ch


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Rosen Karol Salis, PLLC

John A. Karol

Richard L. Rosen

USA

Leonard S. Salis

(iii) the person granted the right to engage in such business is required to pay to the franchisor or an affiliate of the franchisor, directly or indirectly, a franchise fee of $500 or more.

In essence, the above states’ laws mirror the FTC Franchise Rule. A second group of states vary from the model by iden-tifying a “community of interest” as an element rather than a “marketing plan” (e.g., Hawaii, Minnesota, Mississippi, Nebraska and South Dakota follow this model).

A “community of interest” means a continuing financial interest between the franchisor and franchisee in the operation of the franchise business.

A third group of states, including Connecticut, Missouri, NewYorkandNewJersey,use“two-pronged”definitionsofa“franchise” (contrast this with the “three-pronged” federal defi-nition).Forexample,NewJerseylawprovidesthatabusinessarrangement qualifies as a “franchise” if: (i) there is a written agreement in which one person grants

another a licence to use a trade name, trademark, service mark, or related characteristic; and

(ii) there is a community of interest in the marketing of the goods and services being offered.

New York adopts a “two-pronged” approach in its own unique way. The first prong contains one of two elements: a New York franchisee either operates under a marketing plan or is granted the use of a trademark. In either case, the franchisee always pays a franchise fee (the “second prong”).


The federal FTC Franchise Rule imposes a pre-sale disclosure requirement that applies to all states, obligating franchisors to furnish prospective franchisees with the material terms of the fran-chise relationship prior to consummating the sale of a franchise. Franchisors disclose this material information in a prescribed format commonly referred to as a Franchise Disclosure Document (“FDD”). In addition, at the state level, 15 states have registration and/or disclosure requirements that must be met before a franchise can be offered and sold in that state. Only 11 of these states require that: (i) a state agency review the FDD; and (ii) the franchisor



The U.S. Federal Trade Commission (“FTC”) promulgated 16 C.F.R. Part 436 (the “FTC Franchise Rule”) to regulate the offer and sale of franchises throughout the United States. Under the FTC Franchise Rule, a commercial business arrangement or relationship will be deemed to be a “franchise” if the terms of the contract (whether oral or written) satisfy the following three definitional elements:(i) the franchisee will obtain the right to operate a busi-

ness that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;

(ii) the franchisor will exert or has authority to exert a signif-icant degree of control over the franchisee’s method of operation, or provides significant assistance in the fran-chisee’s method of operation; and

(iii) as a condition of obtaining or commencing operation of the franchise, the franchisee will make a required payment or commit to make a required payment to the franchisor or its affiliate. According to the FTC’s Compliance Guide, the required payment must be a minimum of at least $500 during the first six months of operations.

At the state level, there is no uniform legal definition of a “fran-chise”. Each state defines “franchise” differently. For example, California, Illinois, Indiana, Iowa, Maryland, Michigan, North Dakota, Oregon, Rhode Island, Virginia, Washington, and Wisconsin, a business arrangement is a “franchise”, if, under the terms of the agreement:(i) a franchisee is granted the right to offer, sell, or distribute

goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor;

(ii) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the fran-chisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and


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rescission, or damages on behalf of the affected franchisees. While the FTC can bring an action against franchisors who violate the FTC Franchise Rule, no such private right of action is granted to aggrieved franchisees. Although franchisees do not have a private right of action under federal law, state fran-chise disclosure laws permit an aggrieved franchisee to bring an action against the franchisor for violations of state registra-tion and disclosure laws. These claims most commonly include actions for rescission of the franchise agreement and/or actions for actual damages (including reasonable attorneys’ fees and expenses).

With respect to pre-sale disclosure requirements, franchisors may look to the Franchise Registration and Disclosure Guidelines (the “Guidelines”) promulgated by the North American Securities Administrators Association, Inc. (“NASAA”) as a resource (along with other NASAA publications). NASAA is a voluntary asso-ciation with a membership consisting of 67 state and territo-rial securities administrators in the 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico. NASAA facilitates multi-state enforcement actions, information sharing and education (including the publication of new materials). The Guidelines provide an item-by-item break-down of the information required to be disclosed in FDDs.

On May 19, 2019, NASAA adopted three new cover pages which were to be incorporated into FDDs beginning on January 1, 2020. These new pages include: “How toUse thisFranchise Disclosure Document”, “What You Need to Know About Franchising” and “Special Risks to Consider about This Franchise”. The NASAA website provides instructions for use of the new cover pages (https://www.nasaa.org/industry-resources/franchise-resources/).


The FTC Franchise Rule imposes a pre-sale disclosure require-ment on franchisors selling franchises using the business format method of franchising, but no such pre-sale disclosure require-ment applies to sub-franchisees. While the FTC Franchise Rule does not directly address master franchising, NASAA has adopted a Multi-Unit Commentary that provides franchisors with practical guidance concerning their disclosure obligations with respect to certain multi-unit franchising arrangements, including master franchising. Under the NASAA guidelines, franchisors are required to prepare a separate FDD (from the FDD the franchisor uses) for offering and selling sub-franchise rights to prospective master franchisees/sub-franchisors. This pre-sale disclosure requirement is not only imposed on fran-chisors offering and selling sub-franchise rights to prospective franchisees and multi-unit developers, it is also imposed upon master franchisee/sub-franchisors who “step-into” the fran-chisor’s shoes and engage in franchise sales activities and provide training and support to sub-franchisees. Therefore, under the NASAA guidelines, master franchisees/sub-franchisors are responsible for preparing and providing their own FDD in connection with their offer and sale of sub-franchises and, where applicable, complying with state registration requirements.


Under the FTC Franchise Rule, franchisors are obligated to

register its franchise programme with the state. In “registration states”, the franchisor and/or the disclosure document must be registered and approved by the appropriate state agency before the franchisor can commence any franchise sales activities in that state. Twenty-five states have business opportunity laws which extend the disclosure protections afforded to franchisees to consumers that purchase business opportunities, including franchises. Under these laws, sellers are obligated to prepare and disclose certain information to prospective buyers prior to the consummation of a sale. Typically, the information required to be disclosed by sellers under business opportunity laws is less extensive than what is required to be disclosed under the FTC Franchise Rule or state franchise laws. Thus, many franchisors tend to be “exempt” or “excluded” from business opportunity laws provided that they are in compliance with the FTC Franchise Rule and provide prospec-tive franchisees with an FDD. Obtaining the exemption or exclu-sion may require some act of the franchisor (e.g., Florida, Kentucky, Nebraska, Texas and Utah require the filing of a notice with the state to qualify for an exemption).


Business format franchising is the primary method by which franchisors elect to expand their brand in different domestic consumer markets. However, it is not the preferred method of franchising for U.S.-based franchisors looking to establish their presence internationally. Franchisors seeking global expansion of their brand will typically partner with a single franchisee/licensee (“master franchisee”) to develop, market and operate units under the franchisor’s brand within a specified geographic region. This form of expansion is more commonly referred to as master franchising. Under this form of expansion, a master franchisee/sub-franchisor is treated as a franchisee for the purposes of franchise disclosure and registration laws. The master franchisee/sub-franchisor is making a substantial invest-ment in the franchisor’s system and it is therefore afforded the same franchise disclosure and registration protections as if it was a “typical” franchisee.


The FTC Franchise Rule does not require franchisors to register their FDDs with a federal administrative or governmental agency. It only imposes a pre-sale disclosure requirement on franchisors. However, as noted in the response to question 1.2 above, there are 15 states that require a franchisor to either: (i) register their FDD; or (ii) file a notice of intent with the appro-priate regulatory authority prior to any offer or sale of a fran-chise or multi-unit development rights within the state.


Any violation of the pre-sale disclosure requirement imposed by the FTC Franchise Rule is a violation of the FTC Act, and grants the FTC the right to sue franchisors in federal court and to seek any or all of the following remedies: (i) civil penal-ties of up to $11,000 per violation; (ii) injunctive relief with respect to violations of the FTC Franchise Rule, including barring franchise sales in the United States; and (iii) restitution,


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their submissions. (E.g., New York extended its filing deadline anadditional90daysfromApril30toJuly30,2020[the“ReliefPeriod”]. Franchisors in New York may continue to offer and sell franchises during the Relief Period.)


A myriad of federal and state regulatory frameworks each have their own varied repercussions for non-compliance. Under federal law, violations of the FTC Franchise Rule are deemed “unfair or deceptive acts or practices” in violation of Section 5 of the FTC Act. The FTC can initiate enforcement actions against franchisors, and the FTC may exercise broad investiga-tory powers in doing so, including the ability to investigate, take testimony, examine witnesses, issue civil investigatory demands (“CIDs”), and issue subpoenas, with the additional ability to enforce their powers in federal court (see e.g. 15 USC 46, 49, 57, and 16 CFR Section 2.5). If a violation is found, the FTC may seek to have an administrative enforcement proceeding in frontofanadministrativelawjudge(“ALJ”),andanydecisionoftheALJisenforceableinfederalcourt.Remediesmayincludepreliminary and permanent injunctive relief, including poten-tially barring a franchisor from conducting business or engaging in certain conduct (15 USC Section 56(b)), civil penalties, resti-tution of aggrieved parties, and other equitable relief. However, such enforcement actions by the FTC are relatively uncommon in the franchise context.

Many individual states have their own regulatory enforcement scheme, typically enforced through a state’s Attorney General’s office, depending upon the state-specific franchise consumer protection law. While remedies differ by state, these state stat-utes can allow state regulators to impose fines, obtain prelim-inary and permanent injunctive relief (again, including poten-tially barring a franchisor from conducting business within the state), and relief for aggrieved parties, such as damages, restitu-tion, or rescission. Some state violations are even punishable as crimes.

Violations may also subject a franchisor (or inadvertent fran-chisor) to liability from franchisees. Notably, the FTC Act does not provide for a private right of action. However, as discussed herein, many states have “Little FTC Acts”, which do provide for private rights of action for pre-sale disclosure obligations. Such claims typically allege that a franchisor’s failure to provide a compliant FDD before entering into a franchise business rela-tionship violated the federal FTC Rule, which in turn violated the particular state’s “Little FTC Act”, which does allow a private right of action. Notably, many of these state-specific consumer protection acts grant significantly augmented damages, including in some cases, multiples of damages, puni-tive damages, and attorney fee-shifting.

In addition, there are currently 15 states (see question 1.2, above), which provide for state-specific registration or disclo-sure obligations, and 25 states have business opportunity laws, which must be complied with. Each of these state statutes has its own applicable remedies, and many not only provide regula-tors with enforcement powers, but also permit damaged parties to maintain private rights of action. Again, these state-spe-cific statutes have different remedies, and may often include augmented damages, fee-shifting, costs, and additional reme-dies such as rescission. Some state statutes also impose indi-vidual liability on officers, directors, control persons, or princi-pals of franchisors engaging in prohibited activity.

Additionally, even where a technical right of action may not be available to an aggrieved party based upon disclosure

furnish prospective franchisees and multi-unit developers with certain material information through the prescribed format of an FDD. The purpose of the FDD is to provide prospective franchisees and multi-unit developers with the information they need to make an informed decision about investing in the fran-chisor’s franchise system. The FDDs, which are the most essen-tial component of the pre-sale due diligence process, are uniform in structure and are comprised of 23 categories (“Items”) (which are laid out in the FTC Franchise Rule) of detailed information and accompanying exhibits regarding, among other things: (i) the history of the franchisor (and any parent or affiliate), including any history of bankruptcy or litigation; (ii) the busi-ness experience of the franchisor’s principals; (iii) the recur-ring or occasional fees associated with operating the franchised business; (iv) an estimate of the initial investment in order to commence operations; (v) the products (and sources for those products) that the franchisor wants the franchisee to use and/or purchase in connection with the operation of the franchised business; (vi) any direct or indirect financing (along with the terms of such financing) being offered by the franchisor; (vii) a list of all of the franchisor’s word marks, service marks, trade-marks, slogans, designs, and patents that will be used in connec-tion with the operation of the franchised business; (viii) the territory in which the franchisee will operate, along with any rights retained by the franchisor to operate or cause a third party to operate in such territory; (ix) the exit strategies available to the franchisee and franchisor; (x) a description of how disputes are resolved; and (xi) the franchisor’s financial performance, etc.

One of the Items that prospective franchisees and multi-unit developers usually deem to be amongst the most vital in analysing the franchise opportunity is financial performance information concerning existing franchised and company-owned units. These will include past or projected revenues or sales, gross income, and net income or profits. Franchisors are not required by federal or state law to provide prospective fran-chisees with this information, but if they choose to do so, they may provide the information in Item 19 of the FDD; provided that there is a reasonable basis for the information and such information is properly disclosed. Improper financial perfor-mance representations can (and have, in many instances) give rise to a governmental or private cause of action under federal, state and/or common law (although there is no private right of action under the FTC Franchise Rule). NASAA provides commentary (adopted May 2017) on certain aspects of the financial perfor-mance representations which may be disclosed under Item 19.

The FTC Franchise Rule requires new annual information (including updated audited financial information) to be made within 120 days of the end of each fiscal year. In addition, at the end of each fiscal quarter, a franchisor must prepare and include in Item 22 an attachment reflecting any “material” changes to its FDD (e.g., bankruptcy filings or pending litigation filed against the franchisor).

In addition to the federal requirement to update an FDD, certain states require the franchisor to update the FDD and submit amendment filings (e.g., in New York, California, Maryland, Michigan, North Dakota and Rhode island, a fran-chisor must “promptly” update its FDD and file an amendment with the state agency whenever there is a material change to the disclosed information).

Due to the Coronavirus pandemic, various registration states have devised ways of accommodating franchisors impacted by the lockdowns who might otherwise fall out of compliance as a result. For example, several states have begun encouraging online filing of renewals and registrations (e.g., California and Hawaii). Other states have opted to extend registration renewal filing deadlines to allow additional time for franchisors to make


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activities in the state. A Franchise Seller Disclosure Form and/or Franchise Broker Registration Form must be submitted with each initial registration application, annual renewal application and any post-amendments to a franchisor’s FDD.


No. While membership in a national franchise association is not mandatory, it is advisable. Many franchisors, individual fran-chisees and businesses that service the franchising industry are members of the International Franchise Association (“IFA”), which is the largest and oldest global franchising organisation. The IFA provides its members with a wealth of valuable infor-mation (including, but not limited to, the latest legal develop-ments affecting the franchising industry, networking platforms and franchise opportunity information) relating to the fran-chising industry. For information about the IFA, visit their website at: http://www.franchise.org. In addition to holding membership in the IFA, many franchisees and franchisee associ-ations are members of the American Association of Franchisees and Dealers (the “AAFD”). The AAFD has promulgated a code of Fair Franchising Standards which sets forth the AAFD’s view of requirements for a more “level playing field” between fran-chisors and franchisees. Visit https://www.aafd.org for more information about the AAFD.


The IFA has a Code of Ethics that can be found at http://www.franchise.org/mission-statementvisioncode-of-ethics. While it does not have the force or effect of law, this Code of Ethics provides IFA’s members with a framework for the manner in which they are to act in their franchise relationships.


No. Federal and state law only require that the FDD be written in “plain English”.



Generally, there are no restrictions relating to foreign invest-ment in a business in the United States. Such restrictions are contrary to the general approach to free trade. Typically, coun-tries with developing markets are more likely to impose such “foreign investment” restrictions and regulations. However, the U.S. federal government imposes certain restrictions, including, for example, disclosure filing requirements and/or actual limits on foreign investment that may apply to certain highly regulated sectors and/or sensitive industries or businesses (e.g., commu-nications and broadcasting), especially those which may have a potential impact on national security (e.g., banking, tech-nology, weapons manufacture, maritime, aircraft, energy, etc.).

requirements alone, it should not be lost on franchisors that the presence of disclosure violations can lead to a greater risk of liability for common law claims, including fraud and misrepre-sentation, or even for violations of the implied covenant of good faith and fair dealing. In large part, an FDD (with its many protective disclosures and disclaimers) is a protective docu-ment for a franchisor, and franchisors are well advised to take care to show that a prospective franchisee properly received a compliant FDD.

Finally, in the COVID-19 pandemic, franchisors should be particularly mindful of the need to update their disclosures, as both federal and state law may require franchisors to provide interim disclosures or amendments if circumstances have mate-rially changed due to the pandemic, particularly if they result in adverse changes. Material changes in the franchised system’s operations may be forced by governmental mandates (e.g. prohibiting “in person” interaction with customers), or material changes to financial conditions or disclosures may be triggered by significant changes in revenues, or closures of units. These types of adverse changes may require a franchisor to amend, and redisclose the amendment to an FDD to prospective franchi-sees (or even recently-disclosed franchisees). The failure to do so may result in a violation that could entail the risk of substan-tial civil liability (see e.g. NY’s Franchise Regulations Section 200.5(b) (amendments to franchise offering prospectus) (“mate-rial change”)).


Although franchisors must ensure that they strictly adhere to the aforementioned franchise disclosure and registration laws, there are other business and legal elements that the franchisor must address prior to engaging in franchise sales activities.

Trademark and Assumed Business Name Registration. As noted in the response to question 1.1 above, in order for a busi-ness arrangement to qualify as a franchise, the franchisee must operate its franchised business under the franchisor’s trade-mark. Therefore, franchisors should look to register all trade-marks, service marks, trade names, logos, domain names, or other commercial symbols that will be used in connection with the franchise system, prior to offering and selling franchises. Additionally, franchisors should register any assumed business names under which they operate with the proper administrative agency, prior to offering and selling franchises, in order to protect their rights to use that particular assumed name.

Advertising Materials Related to the Sale of Franchises. Certain registration states, like New York, require that fran-chisors file any materials that advertise the sale of franchises (such as brochures and websites) prior to the advertisement’s first publication in that state.

Registration of Franchise Brokers and Sellers. Certain states require franchisors to register their franchise sellers with the appropriate regulatory agency before that person is permitted to sell franchises or multi-unit development rights in that state. In these states, franchisors must file a Franchise Seller Disclosure Form for each franchise seller, which includes the seller’s name, business address and phone number, his or her employer, title, five-year employment history and information about certain rele-vant litigation and bankruptcy matters. In instances where a fran-chisor elects to use a franchise sales broker, two states (New York and Washington) require franchisors to file a separate registra-tion form that provides the state with more detailed information about the broker. These states additionally require the broker to have a licence from the state prior to engaging in franchise sales



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Many franchisors, including foreign franchisors, do not rely solely on selling single unit franchises. In international fran-chising, franchisors typically establish a franchise network by utilising either (or sometimes both) the master franchise (or sub-franchisor) method and/or the area development method. The more common approach in international franchising in the United States is the master franchise method, where the master franchisee is granted the right to either develop the assigned territory itself or to sub-franchise the territory to other fran-chisees, with the master franchisee taking on “franchisor” obli-gations (e.g., providing initial training and ongoing support and guidance) and typically receiving a significant share of the initial franchise fees and ongoing royalty payments paid by the franchisees within the territory. Alternatively, some fran-chisors, who wish to retain more control over their franchise network and do not wish to share their initial franchise fees and ongoing royalty fees with a master franchisee, will grant terri-tories to “area developers” who obligate themselves to develop their territory, but have no rights to offer sub-franchises to other franchisees. Since the U.S. is a large country with varying demo-graphics and diverse cultures, franchisors often utilise a combi-nation of the master franchise and area development franchise arrangements to expand their franchise network. Another option is for the franchisor to enter into a “joint venture” with an independent company, presumably a joint venture partner located in the U.S. Such a partner may have significant experi-ence in operating franchises or the ability to provide significant financial resources to the franchise system, or perhaps both. However, the “joint venture” approach has not been frequently utilised by franchisors (including foreign franchisors). Potential disadvantages of joint ventures include, among others: (i) the risk of ineffective management and/or disagreements with the partner; (ii) requiring a large investment; and (iii) the sharing of initial and ongoing fees, profits and other benefits.


In the United States, new business entities are formed under state law and their formation documents (e.g., for corporations: the Certificate of Incorporation; and for LLCs: the Articles of Organisation) are filed with the Secretary of State (or similar agency) in the state of formation. (In a small number of states, there are publication requirements for new business entities, most notably, in New York with respect to LLCs, limited liability partnerships (“LLPs”) and limited partnerships (“LPs”).) Any new business entity formed in the United States is required to obtain a federal taxpayer identification number by filing Form SS-4 with the Internal Revenue Service. If the new entity will conduct business in multiple states, it will likely have to file an application in each state (other than the state of formation) in order to qualify to “do business”. In each state where the entity is authorised to “do business”, it must list a designated “regis-tered agent” (who resides in the state, in the case of an indi-vidual; or which has a physical location in the state, in the case of a business entity), upon whom service of process (e.g., lawsuit documents) may be served.

New entities must also register as an employer with the department of labour of the formation state and must with-hold proper amounts of certain taxes including, for example, income taxes and Federal Insurance Contribution Act (“FICA”) taxes (which include contributions to federal Social Security and Medicare programmes). A handful of states require the filing of initial reports and tax forms rather than waiting to file an annual

As franchise opportunities in the United States do not typically involve these industries or businesses, it is not likely that fran-chisors will be affected by such restrictions.


As is frequently the case with other businesses, franchisors oper-ating in the United States will typically utilise a corporation or limited liability company (“LLC”) as their preferred form of business entity. While each of these entity types offers “limited liability” to its owners, choosing between the two will depend on the legal, financial and tax needs of the franchisor and its princi-pals. If a franchisor chooses to use the corporate form of entity, typically a “C corporation” is used (as opposed to an “S corpora-tion” which is most often used in connection with small, closely held businesses, such as those formed by franchisees. It is impor-tant to note that foreign investors are prohibited from being owners of S corporations.) In a C corporation, income which is received by the company is taxed at the entity level. Then, the company’s profits are taxed (again), to the company’s shareholders when distributions are made. However, over the last 20 years many franchisors have chosen to use the LLC as their preferred type of business entity for their business structure, rather than utilising a corporate structure. LLCs offer franchisors greater flexibility in certain areas, including with respect to internal governance require-ments (e.g., fewer “corporate” formalities in management structure and activities, and fewer ownership restrictions), income allocation and the ability to transfer assets out of the entity. Since LLCs are usually treated as “pass through” entities for tax purposes, the enti-ty’s profits are not taxed at the business level. Rather, the profits typically flow through to the company’s owners, proportionately to their ownership percentage. The owners pay taxes on this income as part of their taxable income. An LLC may, however, elect to be treated as a C corporation for tax purposes.

While foreign franchisors are permitted to sell directly to prospective franchisees located within the United States, foreign franchisors typically use one or more affiliate or subsidiary entities to conduct their U.S. operations. However, if a U.S. franchisor is a wholly-owned subsidiary of a foreign parent, then certain finan-cial disclosures regarding the foreign parent will also have to be included in the U.S. franchisor’s “offering prospectus” (the FDD) which must be given to all prospective franchisees. Usually, fran-chisors (including foreign franchisors) find it useful to utilise a tiered “corporate” structure comprising a holding company or “parent” company at the “top” and several subsidiary operating entities, “below” the holding company. (This “corporate” struc-ture approach may be used for LLCs as well as corporations.) For example, one operating entity may own the intellectual property rights (typically, trademarks or service marks) associated with the franchise system; another might be the “franchisor entity” which would enter into the franchise agreement (and other agreements) with franchisees; another might be a management company which would provide the various “franchisor services” to the franchisees; and yet another could purchase, sell or lease equip-ment to franchised or company owned units. Typically, separate entities are also formed in order to hold title to each parcel of real estate that is owned by the franchisor or its affiliates. Where the franchisor subleases the various premises to its franchisees, the franchisor may choose to form separate entities to enter into each “master-lease” with the landlord rather than have one real estate “leasing entity”. This provides the franchisor (and its affiliates) with greater asset protection and additional flexibility in the event that it wanted to sell or transfer a particular parcel of real estate.


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with all applicable disclosure requirements, and properly detail any potentially anti-competitive aspects of the franchise rela-tionship within the FDD (e.g., specific suppliers that must be used), so as to significantly lessen any potential liability for anti-trust issues with their franchisees in the context of the offer or sale of the franchise.

Notably, there may be circumstances where an offer or sale of a franchise constitutes an “unfair” or “deceptive” act or practice, under either federal law or an analogous state law. The federal FTC is responsible for consumer protection enforcement for over 70 different laws, including the FTC Act, which contains a broad prohibition against “unfair and deceptive acts or prac-tices”. See e.g. §15 U.S.C. 45 (“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful”). Many states also have enacted similar statutory schemes prohibiting unfair or deceptive trade practices (sometimes called “Little FTC Acts”), many of which provide for a private right of action.


No. There is no federal regulation of the maximum permitted term for a franchise agreement. However, there is wide vari-ation with respect to the enforceability of unlimited terms in specific states. Some states may be reluctant to enforce fran-chise agreements without a limited term. This may apply to franchise agreements without a specified duration, or to auto-matic renewal agreements that continue in perpetuity (for example, an agreement that renews automatically every 10 years without any limit). On the other end of the spectrum, the New JerseyFranchisePracticesAct(NJStat.56:10-1et seq.) requires a franchisor to automatically renew a franchise agreement, regard-less of the stated term in the agreement, so long as a franchisee is in substantial compliance with the franchise agreement. Again, the franchise practitioner is well advised to review all applicable state laws in addition to federal law in connection with this issue.


No. As noted above, there are some states that may be hostile to enforcing agreements without any stated term, but there is no antitrust statutory restriction. The FDD must adequately disclose any required related product supply agreements, and the franchise agreement must clearly provide for it. In addi-tion, there may be circumstances where, for example, a supply agreement becomes so onerous that it may excuse performance, violate a state statute, or give rise to a claim, so that its enforce-mentbecomesunreasonable(suchastheNewJerseyFranchisePractices Act, which makes it unlawful “to impose unreason-able standards of performance upon a franchisee”, seeNJStat.§56:10-7(e)).


Federal antitrust law will prohibit the use of a minimum resale price (“MRP”) if the MRP causes an adverse effect on inter-brand competition under a “rule of reason” test (if it results in an unreasonable restraint of trade concerning competitors, based upon economic factors). Therefore, under federal law, MRPs are permitted, and courts have been reluctant to find violations where there is an economic justification for them, resulting in

report. Finally, entities which are involved in certain specific industries or types of businesses (e.g., education/school-based, childcare-based businesses, or businesses selling alcohol to the public) may have to obtain one or more licences or permits in order to comply with state or local laws.

3 Competition Law


In the U.S., “competition law” is generally referred to as “anti-trust law”. In contrast to other jurisdictions, such as the E.U., “antitrust” laws do not directly regulate the offer and sale of fran-chises. Rather, the FTC Rule (16 C.F.R. 436 et seq.), and statutes in certain states (such as New York’s Franchise Sales Act (N.Y. G.B.L. §680 et seq.) or California’s Franchise Investment Law (CA Corp. Code §31000 et seq.)), directly regulate the required disclosures and sales practices with respect to the offer and sale of franchises (discussed in detail in section 1, above). However, these are not generally considered “antitrust” or “competition” laws in the U.S.

Nonetheless, despite not directly regulating the sale of fran-chises, there are “antitrust” laws that do impact upon the fran-chise relationship that apply in the United States. On the federal level, the major antitrust statutes that may apply to franchising are the Sherman Act, (15 U.S.C. §1 et seq.) (generally prohib-iting anti-competitive or monopolistic conduct), the Clayton Antitrust Act (15 U.S.C. §§12 et seq.) and the Robinson-Patman Act (at 15 U.S.C. §13) (generally prohibiting anti-competitive price discrimination, exclusive dealing, and tying). The Antitrust Division of the U.S. Dept. of Justice (“DOJ”) andthe FTC cooperate to enforce the federal antitrust laws, while the Clayton Act authorises private rights of action. In addi-tion, almost every state in the U.S. has enacted its own anti-trust laws, which are usually based upon, but may differ from, the federal antitrust statutes. Therefore, while these state stat-utes may be similar, and usually look to federal law for guidance, practitioners need to examine both the federal and state laws in the applicable jurisdiction in order to avoid any potential issues.

While antitrust was once a major area of interest and litiga-tion for both franchisors and franchisees, courts in recent years have significantly limited the applicability of antitrust laws in the franchise context (with the recent exception of “no-poach” provisions, see question 3.6, below). Traditionally vexing anti-trust claims, such as franchisee complaints of price-fixing (e.g., franchisors setting maximum or minimum prices), exclu-sive dealing requirements (e.g., requiring franchisees to deal only with particular designated vendors or suppliers), or tying (e.g., requiring that franchisees purchase products or services not directly related to the trademarked franchised product or service), have dramatically fallen in the last two decades in the wake of court decisions that prevent these claims from being successful in the franchise context. Many courts have narrowly restricted the definition of the applicable “market” for antitrust analysis in ways that effectively exclude franchise relationships. In addition, courts now increasingly employ the “rule of reason” test in circumstances that would once have been considered to be per se violations of antitrust laws. In most franchise circum-stances, a franchise agreement which clearly provides for (and an FDD which adequately discloses) contractual requirements to purchase certain goods or services, restraints on a franchisee’s ability to freely conduct business, or requirements that fran-chisees deal only with specific vendors, will defeat most anti-trust claims. Prudent franchisors are well advised to comply



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Although there is no specific federal minimum obligation with respect to the territorial rights of franchisees, encroach-ment or the unfair allocation of territories could lead to liability outside of antitrust law (discussed infra), such as for violation of the implied covenant of “good faith and fair dealing”, which many states automatically incorporate, by law, into every contract. In addition, certain state franchising statutes may restrict or prohibit unfair encroachment activity (see e.g. Minnesota’s Franchise Statute, MN Stat. §80C.14; and Rule 2860.4400, Unfair and Inequitable Practices).

What many franchise practitioners consider to be the “bottom line” in this regard is that the provisions in the fran-chise agreement (and the disclosures in the FDD) that address and define the franchisor’s right to sell franchises (or operate branded units itself ) in a franchisee’s “protected territory” must be crafted with great care. Franchisors are well advised to give thought not merely to geographical limits, but also to the applicable “market” of customers to which a franchisee will be selling its goods and services. Indeed, encroachment issues now also encompass non-traditional methods of providing products and services in competition with a franchisee, such as through e-commerce, or the use of non-traditional sales-points, such as food trucks, kiosks or promotional activity within a territory of a franchisee. Healthy franchise systems should take steps to ensure that each franchised business has a sufficient “market” of customers to remain viable and profitable, as that not only mini-mises the potential for litigation, but also ultimately is in the best interests of both the franchisor, and its individual franchisees.


Under federal antitrust law, in-term and post-term non-compete clauses (with respect to franchisees) and non-solicitation of customer provisions are generally enforceable, and there is no per se prohibition against them. However, that is not dispos-itive, as the enforceability of these contract terms depends largely on state law. Some states may prohibit or severely restrict post-termination non-competition clauses. California law, for example, generally voids any post-termination non-competition clauses (see e.g. CA B&P Code §§16600 et seq.). In states that restrict non-solicitation and non-compete clauses, enforceability often depends upon factors bearing upon the reasonableness of the restriction, including whether it is necessary to protect legiti-mate business interests, whether the restriction is contrary to the public interest, and whether it is reasonable in geographic scope, the scope of business activity being restricted, and the duration of the restriction. For example, a post-term restrictive cove-nant that only restricts certain activities in direct competition with the franchisor in a small geographic area, for one year, is far more likely to be enforceable than a broad covenant seeking to completely restrain a former franchisee from engaging in a wide range of activities in a large area for many years. In addi-tion, franchise counsel should carefully examine the “choice of law” applicable to a particular agreement or to disputes arising therefrom, as many states do not allow their non-competition statutory provisions to be waived (regardless of what the “choice of law” clause may state in an agreement), and there is signifi-cant variation among jurisdictions as to the enforceability of the non-compete and non-solicitation clauses typically provided for in franchise agreements.

One important exception is “no-poach” agreements, which are non-compete clauses that apply to a franchisee’s employees (e.g. prohibiting one franchisee’s employees from being “recruited” to be employed by another franchisee). This is probably one of the

most cases being dismissed. However, there are state statutes that differ from the federal standard, and which prohibit the use of MRPs. Indeed, while federal law has generally adopted a “rule of reason” standard, state statutes may still consider MRPs to be per se unreasonable restraints of trade, instead of analysing them under the more permissive “rule of reason” test (e.g., CA and NY still have per se prohibitions against MRPs, even if they may not be aggressively enforcing them). This area of law is continuing to develop, and state laws may ultimately gravi-tate towards adopting the federal “rule of reason” analysis, but until those laws change, there is no guarantee that a MRP will be allowed. In addition, while not an “antitrust” issue, MRPs may give rise to other claims by franchisees, such as common law claims for violation of the implied covenant of good faith andfairdealing,orNJ’sprohibitionagainst imposing“unrea-sonablestandardsofperformance”uponfranchisees(NJStat.§56:10-7(e)). The Robinson-Patman Act is another antitrust law that can impact a franchisor’s ability to set pricing. A fran-chisor should be wary of differentiating between certain fran-chisees, or groups of franchisees, in its pricing of required goods or services, as favouritism to certain franchisees may consti-tute violations of the Robinson-Patman Act (15 U.S.C. §13) (anti-competitive price discrimination).

Franchisors should retain competent counsel if they wish to mandate MRPs, especially if they have franchisees in states where per se prohibitions exist against MRPs. Assuming it is permis-sible in all the applicable states, if a franchisor must implement a MRP or system-wide promotion, best practices would suggest at the minimum that such a MRP be franchisor driven, be consis-tent with the franchise agreement and FDD, be based upon a defensible business rationale that demonstrates that the pricing would encourage market competition, not suppress it (prefer-ably after testing or market research is conducted), and have a benefit to the “consumer”. Notably, MRPs are not the exclu-sive mechanism to induce franchisees within a system to main-tain minimum pricing. Other alternatives such as minimum advertised price (“MAP”), or rewards or inducements for fran-chisees who choose to participate in a non-mandatory minimum price, can be utilised. However, such programmes come with their own perils, and if not properly implemented, could lead to anti-competitive liability in their own right.


In general, federal antitrust laws do not require a franchisor to observe any minimum obligations when offering franchises in adjoining territories (or, for that matter, even when a fran-chisor itself operates in an adjoining territory). The FTC Rule does mandate that an FDD includes a detailed disclosure of the rights conferred in any territorial grant, but there are no required obligations (other than those that, typically, are provided by the agreement between the parties). Franchisees will find it diffi-cult to bring antitrust claims on this basis, as the antitrust laws will generally not consider the applicable “market” for antitrust analysis to be competing franchise locations, but rather the market for franchises generally, when the franchisee purchased the fran-chise. Further, there will generally be sufficient justification for “territory” competition under the “rule of reason” analysis to avoid liability under the federal antitrust laws. However, anti-competitive misconduct on the part of a franchisor that impacts inter-brand competitors could still result in liability, and more restrictive state antitrust statutes may also impose liability for anti-competitive conduct within a particular jurisdiction.


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Convention and Madrid Protocol (administered by the World Intellectual Property Organization (“WIPO”)), which allows a trademark to be registered internationally with member nations through a uniform process (an “International Application”). Generally, under the Madrid Protocol, a trademark must first be registered “locally” in a member nation (the “Office of Origin”), approved, and then submitted to the WIPO for inter-national approval and registration (within 12 or 18 months). Once approved at the WIPO level, the mark may be submitted to the other member nations in which the mark holder seeks to obtain trademark protection. When an international mark holder seeks approval of an international trademark within United States (through the Madrid Protocol, often called a “Madrid application” or “Section 66(a) Application”), the appli-cation is submitted to the United States Patent and Trademark Office (“USPTO”). The application will then be examined by the USPTO, in the same manner, and subject to the same stan-dards, as a mark seeking approval within the U.S. The interna-tional mark must be approved by the USPTO before it is allowed to be registered within the U.S.

In the United States, at the federal level, the USPTO is the agency responsible for registering trademarks. Unique logos or designs a franchisor wishes to use in connection with their mark can, and should, also be registered with the USPTO. Applicants can file online with the USPTO, and should regularly check the online monitoring system throughout the process. The USPTO will initially determine if the application has met the minimum filing requirements. If so, it will assign an examining attorney to review the application and determine if any conflicting marks or other defects in the application prevent the applica-tion from being granted (this review by the examining attorney generally takes several months). If an issue with the applica-tion arises, and the examining attorney decides the mark should not be registered, the USPTO will issue a letter explaining the reason for refusal or deficiency (an “Office Action”), and the applicant must respond (a “Response to an Office Action”) within six months, or the mark will be deemed to have been “abandoned”. If the examining attorney approves the mark, or the application overcomes an Office Action, the USPTO will “publish” the mark in the USPTO’s weekly “Official Gazette”, and anyone wishing to challenge it will have 30 days from the date of publication to do so. Objections are heard by an admin-istrative tribunal within the USPTO called the Trademark Trial and Appeal Board (“TTAB”). If no objection is filed, or none are successful, the registration process (which differs slightly if the mark is currently “in use” or not) then continues to formal “registration”, which can take several more months. If the mark is not actively “in use”, the registrant must, after receiving a “notice of allowance”, use the mark in commerce and submit a “Statement of Use” to the USPTO (or request an extension). If an application is refused by the examining attorney, or fails to overcome any objections, there is an appeals process to the TTAB.

After a federal trademark is registered, the registrant must, periodically, take steps to renew the mark, and file “mainte-nance” documents, or risk cancellation. Significantly, a “decla-ration of use” must be filed between five and six years following registration, and a renewal application must be filed 10 years following registration, and every 10 years thereafter (interna-tionally filed marks under the Madrid Protocol follow a slightly different process).

Individual states also have their own trademark registration offices (with their own registration process). While individual state registration is better than either not registering, or relying upon common law trademark rights (discussed below), franchi-sors are well advised to seek federal registration of their mark(s).

“hottest topics” in franchise competition law, and in the past few years “no-poach” agreements have come under increased scrutiny fromfederalandstateregulators,includingthefederalDOJandthe FTC, and pose a significant litigation risk (as, for example, theymayviolatetheShermanAct).InApril2018,theDOJissueda policy update specifically warning the public of its intent to aggressively enforce antitrust laws in relation to labour markets and “no-poach” provisions. Further, several states’ Attorney General’s Offices have aggressively pursued state “no-poach” regulations under state anti-trust laws (notably CA under its Cartwright Act, and WA under its Consumer Protection Act).

Most cases will depend upon which standard is adopted under a particular federal or state (or local) statute, and the determina-tion of whether restraints are deemed to be “vertical” or “hori-zontal”. A case is likely to turn upon whether under the partic-ular circumstances, local caselaw, or statute involved, a strict “per se” standard, a “rule of reason” standard, or a “quick look” (a truncated “rule of reason” test) is used. See e.g. Stigar v. Dough Dough, Inc., Index No. 18-CV-0244 (E.D. Wash. Aug. 3, 2018) (for an informative deliberation of the various standards where afranchiseesuedunderShermanActandWACPA)(DOJandWA AG’s Office filed Amicus Briefs) (ultimately settled prior to determination).

At present, federal law remains unsettled, and different federal courts have adopted different tests. State statutes differ markedly as well, and aggressive state regulators have been pros-ecuting cases under state law arguing a “per se” rule should be applied, independent of the federal anti-competition laws. See e.g. Washington v. Jersey Mike’s Franchise Systems, Inc., No. 18-2-25822-7(SEA) (arguing for a per se rule generally under WA CPA). Given the uncertainty of this area, and the potential civil liability and criminal violations, franchisors should proceed with caution.

In response to regulatory actions, and private class actions, many major franchise systems have entered into consent decrees or unilaterally agreed to change their restrictive covenants so as to avoid enforcement action by regulators and litigation exposure. There are also legislative efforts being made at the federal level, and within multiple states, to pass laws prohib-iting restraints upon employment and poaching. Therefore, franchisors who seek to utilise “no-poach” restraints may be exposing themselves to significant liability and regulatory risk, and need to exercise caution in doing so. Franchisors should avoid making any “no-poach” agreements with other franchi-sors within the same industry, as those will likely be consid-ered “horizontal” and violate federal and state law, and might even result in criminal prosecution. Franchisors and franchisees should shy away from “no-poach” provisions where they may compete for the same employees, especially in the context where franchisors may have company-owned units in the same market. If a no-poach agreement is to be used at all, franchise systems should be prepared to argue its economic benefits and neces-sity, and narrowly tailor them (and document that justification in advance). Regardless, if a local law is hostile to, or outright bans “no-poach” provisions in a particular jurisdiction, they should be avoided altogether. Many franchised systems have already concluded that “no-poach” provisions are just not worth the risk and effort they involve.



At the international level, the United States is a party to the Paris



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situation with effective PR so the brand can protect its marks from any negative social media campaigns. Franchisors, even smaller franchisors, should have contingency plans and systems for addressing problems in place, so they will be able to identify any threat, and respond properly.


Confidential information, which can include know-how, trade secrets, and other business-critical information, may be protected by federal law or state common law, or both.

The Defend Trade Secrets Act of 2016, 18 U.S.C. §1831 et seq. (the “DTSA”) now provides federal protection for trade secrets, and creates a private civil right of action for theft or misap-propriation of trade secrets (which may be brought in federal court), under which an aggrieved party can seek damages, and for wilful and malicious violation, double damages and attor-neys’ fees. Under the DTSA, a party must have provided certain “notice” (under 18 U.S.C. §1833(b)(3)) to any person it wishes to prohibit from disclosing the trade secret(s), including employees, agents, or franchisees, if it wishes to later take advantage of the DTSA’s potential award of exemplary damages or attorneys’ fees. Therefore franchisors (and franchisees) should incorporate into their agreements, policy manuals, confidentiality agreements, and other confidentiality provisions, such “notice”. Under the DTSA, a party may also seek injunctive relief, including an ex parte expedited seizure of the trade secret under certain circumstances. See 18 U.S.C. §1836. Importantly for foreign parties (or in connection with agreements with foreign parties), the DTSA also may provide for extra-jurisdictional liability (reaching violators outside of the U.S.). See 18 U.S.C. §1837. Franchisors are already taking advantage of this new weapon in their arsenal to restrain former franchisees from misappropri-ating trade secrets, and in order to protect the franchisor’s intel-lectual property. See e.g. Panera, LLC v. Nettles and Papa John’s Int’l, Inc.,4:16-cv-1181-JAR,2016WL4124144(E.D.Mo.2016)(franchisor successfully obtained a temporary restraining order against a former employee to prevent dissemination of trade secrets under the DTSA).

Almost every state (except for NY) has adopted some form of the Uniform Trade Secret Act (“UTSA”). In addition, each state (including NY) has its own common law trade secret protection, which operates in addition to protections at the federal level. There is variation between specific states, but typically, a party must show that information it seeks to protect is, indeed, “secret”, and not in the public sphere or known by others. A party must also have also taken significant efforts to maintain the secrecy of its trade secrets in order to be afforded common law or statutory protection. Franchisors should therefore implement policies and procedures designed to protect against the dissemination of confidential information. Where applicable, franchisors should require franchisees to agree to non-disclosure agreements, and should include strong and inclusive confidentiality provisions in their franchise agreements. Franchisors should also mandate that their franchisees require that their own respective agents or employees agree to confidentiality prior to disseminating any of the franchisor’s trade secrets. Franchisors should also consider utilising other security measures, including password-protected computer systems, so as to maintain the “confidentiality” of information (such as client or customer lists and information) that the franchisor may wish to keep “confidential”.

Courts will generally enforce confidentiality agreements and will grant injunctive relief in appropriate circumstances

Significantly, in the United States, unlike in many jurisdic-tions, a party can also establish and acquire “common law” trademark rights through the usage of a mark in commerce. Common law rights to a mark may be superior to another party’s attempt to subsequently register the same or a similar mark, especially if the common law mark is in use prior to the other party’s filing for registration, and the holder of the common law mark objects properly. However, common law rights are not well defined and are often limited by geographic scope and specific industries or markets.

Therefore, while trademarks do not have to be registered to obtain “common law” rights, franchisors are well advised to proceed with, and complete, the federal trademark registration process with the USPTO (outlined above), as a federally registered trademark acts as a “notice to the public” of the franchisor’s claim on the mark and creates a legal presumption of nationwide owner-ship and the exclusive right to use the mark (in connection with the goods or services in the registration). Federal law, including the Lanham Act (15 U.S.C. §1051 et seq.), also grants significant legal remedies for federally registered marks (including, under certain circumstances, injunctive relief, treble damages and attor-neys’ fees). Further, once registered, the federal mark holder has a presumptive argument that it was “first in time” as of its regis-tration (since all objections will either have been rejected, or deemed untimely). After federal trademark protection is granted, an adverse “common law” mark holder will be extremely unlikely to overcome the protection of the federal registration. Trademark infringement actions can also be brought to address online viola-tions, including unauthorised usage of a trademark in a domain name (or “cybersquatting”), by initiating actions under the Lanham Act (as amended by the Anti-Cybersquatting Piracy Act), or initi-ating an arbitration proceeding to seize the offending domain under the Internet Corporation for Assigned Names and Numbers (“ICANN”) Uniform Domain-Name Dispute-Resolution Policy (“UDRP”) procedure, or, if applicable, ICANN’s newly adopted Uniform Rapid Suspension (“URS”) domain name suspension procedure for “top down” domain names.

A trademark holder in the United States is generally required to “police” its mark, by actively monitoring the market in order to discover infringement, and then to take action against infringers so as to protect its mark. A franchisor who fails to take timely action against infringers may lose its right to obtain any relief (due to, inter alia, affirmative defences of laches, acqui-escence or waiver, a finding of abandonment, or where usage of the mark by others causes the mark to lose its distinctive signif-icance). Once it has been established that a franchisor has not properly policed its mark in one instance, subsequent attempts to enforce a mark may become much more difficult, or impos-sible. Constant vigilance is required.

Unfortunately, the question of “protecting” a mark also goes beyond legal protections. A franchisor must also constantly “police” its mark and brand reputation, not just to protect against infringement, but also to ensure that consumers see it in a positive light. The franchisor must keep appraised of online and social media commentary on the mark, and aggres-sively work with its franchisees to address negative comments and adverse online postings. The COVID-19 pandemic has many people frightened, and where a system must interface with the public and customers, an image of safety and cleanli-ness should be projected, and policed, and any negative media to the contrary rectified at both the franchisee level and franchisor level through effective PR. Further, the recent movement for social justice (e.g. the BLM movement) has left the country very racially conscious, and one unfortunate incident in one fran-chised location can have a disproportionate impact upon the entire brand. Again, franchised systems must stay ahead of the


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or commentary. Finally, most online service providers have terms of service that prohibit defamatory or unfairly disparaging speech. Often, it may be sufficient (and cost effective) to directly contact a service provider and attempt to have the offending material removed under the terms of service, at least in the first instance, rather than resort to litigation. However, prior to bringing any action, a franchisor should be mindful that the United States has particularly strong public policy rights associ-ated with freedom of speech. The franchisor should consider whether the potentially offending content is protected opinion, or otherwise qualifies for protection as free speech. There are implications (such as “Anti-SLAPP” statutes) that may punish overly litigious franchisors who bring lawsuits that improperly infringe upon someone’s freedom of speech.


The U.S. is a signatory to many treaties and conventions concerning copyrights, including those overseen by the WIPO. Within the U.S., federal law protects both registered and unregistered copy-righted material. The Federal Digital Millennium Copyright Act (“DMCA”) also provides a mechanism whereby copyright holders can directly notify third-party online service providers that an infringement is occurring (e.g., through a user posting a confiden-tial portion of an operations manual), and ask that the provider remove or disable any access to the infringing material. Most third-party internet service providers also have terms of service that prohibit infringement, and will remove offending material on that basis alone, once notified of unauthorised use of copy-righted material. In addition, common law rights (or even stat-utory rights conferred by states), such as claims for misappropri-ation or unfair competition, may overlap with copyright law to protect information within publications. Nonetheless, there are exceptions to copyright (such as “Fair Usage”), and a franchisor should carefully consider the pitfalls that it may encounter before it commences a lawsuit seeking to protect its copyright.

Franchisors should be mindful that a wide variety of publi-cations and media, including operations manuals, websites and online content, social media pages and content, advertisements, menus, or computer programs may be protectable by copyright. Franchisors should be careful to draft clear agreements covering employees, agents or vendors that designate “work for hire” copyright ownership to the franchisor for materials that are created for the franchisor (lest, for example, a franchisor inad-vertently grants “ownership” of an expensive, custom-designed computer program to a computer programmer).

The culture of the United States tilts decidedly towards protecting intellectual property rights, and punishing those who would misappropriate or engage in unauthorised usage or plagiarism of another’s intellectual property. Federal law often provides for the assessment of additional damages, including exemplary (sometimes treble) damages, and attorney fees, against those who violate the law in this regard. However, a recent decision also cautions that copyrighted materials and generic ideas, including those in “confidential” proprietary fran-chise operation manuals, even if copied verbatim, may not neces-sarily qualify for protection. See e.g. Civility Experts Worldwide v. Molly Manners, LLC,15-cv-0521-WJM-MJW,2016WL865689(D. Colo. 2016) (even though sections of the franchise operating manual were copied practically verbatim, those portions were considered to be so basic, common, and generic, that they did not qualify for protection).

to prevent the theft or misuse of confidential information. Therefore, well-crafted franchise agreements will often include injunctive relief provisions designed to facilitate the protection of confidential information in court. New or prospective fran-chisors should be extremely mindful of confidentiality issues before discussing their “new concept”, their “secret sauce”, or other intellectual property with anyone (including potential investors or prospective business partners). Non-disclosure agreements should be entered into prior to having discussions in which a prospective franchisor has disclosed a trade secret or idea that is unique and worth protecting. In addition, a well-crafted franchise agreement will ensure any “inventions” by a franchisee belong to the franchisor.

Publications by the franchisor, including operations manuals and policy and procedure manuals, may also be protected by federal copyright law (discussed below). In addition, a franchisor might consider applying for a federal patent with the USPTO if a franchisor has a unique invention or product, process, or design. However, confidential trade secrets can be kept in perpe-tuity, while patents expire. Further, in applying for a patent, a company risks publication of its intellectual property, as patents are public; and worse, if a patent application is rejected, it is typi-cally publicly available within 18 months. Therefore, it may be better to protect certain IP as a “trade secret”, depending upon the nature of the IP.

Franchisors often employ restrictive covenants within their fran-chise agreements to prevent a former franchisee (after termination of the franchise agreement) or any person who had access to confi-dential information or trade secrets from subsequently competing with the franchise (e.g., working for a competitor). However, restrictive covenants may not be enforceable. Some states will find them void or unenforceable as a matter of law, and many will not enforce them unless they are truly necessary to protect IP or a brand, and the person(s) being restrained have been adequately compen-sated. Recently, federal and state regulators have been “cracking down” on over-reaching franchisor’s post-employment restrictive covenants as violating anti-competition laws or restraints of trade. Therefore, franchisors should not just rely upon restrictive cove-nants to protect their IP.

Finally, the reputation associated with a brand must be protected from (increasingly all-too-common) online assaults. In this current climate, online social media, third-party product or service reviews, or other online commentary or postings, can have a significant and wide-reaching negative impact on a trademark or brand. As a result, franchisors must now not only remain vigilant in protecting their trademark or intellectual property from being stolen or usurped, but also from unfairly disparaging commentary or defamatory material. Franchisors (and franchisees) are not helpless against unlawful reputa-tional assaults on their branding or trademarks. Traditional common law defamation, based upon the relevant state law, may be utilised when false claims are made concerning a brand or service. In addition, the Lanham Act may also be utilised to protect a federal trademark from statements that might be misleading to consumers, even if such statements are not liter-ally false (which may open the door to bringing claims under the Lanham Act to protect a mark from statements that might not be literally false, but which may be misleading).

The FTC Act may allow a franchisor to seek assistance from the FTC due to a third party utilising “unfair methods of compe-tition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce…” 15 U.S.C. §45(a)(1). “Little FTC Acts” in particular states may also apply, including what are often called unfair and deceptive trade practices acts, and allow a franchisor to bring an action based upon these state statutes to protect its branding from unfair online competition



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sub-franchise agreements with franchisees and then bears the responsibility of providing them with post-sale support. Such a master is treated as a “sub-franchisor” under federal and state disclosure laws and should issue and register an FDD.

If the master and/or franchisor fail to comply with their respec-tive disclosure obligations, the FTC Act and most state franchise statutes deem them jointly and severally liable for the violation(s). As a result, a franchisor and master will often include a mutual indemnification clause in the Master Franchise Agreement. Indemnity provisions are generally enforceable, except, in certain states, where indemnification for the intentional misconduct of the indemnitee is void as a matter of public policy.


It depends. The FTC’s Franchise Rule deems it an unfair or deceptive trade practice for a franchisor to disclaim, or require a prospective franchisee to waive reliance on, representations made in the FDD itself. Accordingly, disclaimers are ineffec-tive with respect to representations made in the FDD; they may only help shield a franchisor from liability for misrepresenta-tions made outside of the FDD. Additionally, disclaimer clauses will not insulate a franchisor from liability for a material omis-sion in its pre-sale disclosures.

Specific disclaimers are more effective than general, boiler-plate disclaimers or integration clauses. For this reason, franchi-sors often require that its franchisees sign, along with the fran-chise agreement, a detailed questionnaire affirming that certain representations were or were not made prior to the sale.

Several state franchise laws have anti-waiver provisions which render unenforceable a contractual provision that purports to waive a franchisee’s legal right to recover damages for a franchi-sor’s pre-contractual misrepresentations. In other jurisdictions, if a franchisee is fraudulently induced to execute a franchise agreement, merger and integration clauses may be unenforce-able based on the theory that fraud is extraneous to the contract. If nothing else, though, disclaimer clauses may be used by a franchisor to argue that its franchisee did not reasonably rely on the misrepresentation and as a deterrent to litigation brought by franchisees.


Yes, franchisees can sue as a group and may even bring a class action lawsuit if the putative class meets the federal or appli-cable state law requirements for class certification. In the right circumstances, a franchisee association may be able to commence a lawsuit against the franchisor on behalf of its fran-chisee members or create a litigation fund to sponsor a lawsuit by one of its franchisee members.

However, franchisees are almost always required under the terms of their franchise agreements to sue the franchisor on an individual basis and relinquish any right to pursue a group or class action lawsuit. Typically, class action waiver clauses are incorporated in the arbitration provisions of a franchise agree-ment and prohibit class or group arbitrations. It is settled law that class action waivers included in arbitration provisions are enforceable. Stand-alone class action waiver provisions are also generally enforceable, but may not be enforced under certain state laws if they are found to be unconscionable.

It is not prudent for a franchisor to rely upon statutory protection alone to protect its IP. A franchisor should have clear and enforceable provisions within its franchise agree-ments protecting the IP, and declaring it a material breach for any failure to do so (in addition to any regulatory or statutory protections). These provisions should make it clear that any IP or manuals are the property of the franchisor, and are only being temporarily licensed. The dispute resolution provisions should provide a “carve out” for a franchisor to go to court to obtain injunctive or other relief to protect its IP, and upon termina-tion of a franchise, a franchisor should require destruction or return of any and all property and IP that a franchisor wishes to protect, so at the minimum, breach of contract may be employed in addition to statutory or other rights.

5 Liability


A franchisee does not have a right under the FTC’s Franchise Rule to sue a franchisor for failing to comply with its disclosure obligations. Even though the FTC is authorised to commence its own enforcement action against a franchisor that violates the FTC’s Franchise Rule, it rarely exercises its right to do so.

In certain states, a franchisee can bring claims against its fran-chisor (and control persons) pursuant to a state unfair trade practices act (“Little FTC Act”), state franchise statute, and/or state busi-ness opportunity law. If successful, such a franchisee may be enti-tled to rescission and/or damages, as well as costs, reasonable attor-neys’ fees and statutory interest. Rescission is designed to restore the parties to the “status quo ante” (the condition they were in before the violations occurred). An award of rescission will undoubtedly require the restitution of any money already paid to the franchisor (e.g., the franchise fee and royalty payments); depending on the state law, it may also entitle a franchisee to recover its initial invest-ment costs and operational losses. However, rescission may only be available under limited circumstances (e.g., for wilful and material violations). In a few states, courts have discretion to award treble damages to plaintiff franchisees. The rights and potential remedies available to a franchisee will depend on the applicable law and so, it is generally advisable for a franchisee to retain counsel knowledge-able in the applicable state’s franchise law. State enforcement agen-cies may also seek to impose civil and criminal penalties or obtain an injunction against a non-compliant franchisor.

To the extent a franchisor’s disclosure violations provide the basis for an independently actionable claim (e.g., for negligent or fraudulent misrepresentation, fraudulent inducement), the fran-chisee can always sue the franchisor under common law. In all likelihood, though, the claims will not be as strong as they might otherwise be if they were statutorily driven, and the remedies available will also be more limited.


A typical master franchisee (“master”) enters into unit or


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The FAA applies where interstate commerce is involved and, in such cases, it pre-empts any U.S. state law that purports to deny or limit the right of contracting parties to agree to arbitrate their disputes. The main international arbitration forums located in the United States are the American Arbitration Association’s (“AAAs”) international division, known as the International Centre for Dispute Resolution (“ICDR”), and the International Institute for Conflict Prevention & Resolution (“CPR”). The International Chamber of Commerce (“ICC”) can also admin-ister arbitrations from its New York City office. Other organ-isations such as the London Court of International Arbitration (“LCIA”) can conduct U.S.-seated arbitrations from their foreign offices. Ad hoc (self-administered) arbitrations often proceed in accordance with the UNCITRAL Arbitration Rules or the CPR’s Non-Administered Arbitration Rules.

The United States acceded to the New York Arbitration Convention in 1970, agreeing to recognise and enforce arbi-tral awards made in the territory of another contracting state to the extent they resolve commercial disputes. It also ratified the Inter-American Convention on International Commercial Arbitration (Panama Convention), which requires that the U.S. and most South American nations enforce arbitration agree-ments and awards in one another’s countries. The New York Convention and Panama Convention have been incorporated into U.S. law in Chapters 2 and 3, respectively, of the FAA. The assurance that an arbitral award will be recognised and enforced by the courts of signatory nations is a major reason why arbitra-tion is generally the preferred method of dispute resolution in the international context.

7 Real Estate


The U.S. represents a huge real estate market with urban, suburban and rural areas. It is not one homogenous market, but rather is comprised of diverse area within which there are wide differences with respect to commercial leasing conditions. As such, there is no typical length of term for a commercial lease in the U.S. The term may vary depending on a variety of factors including, for example, the area type and specifics of the local market, the premises (e.g., retail, office or industrial), general economic and market conditions, the landlord, lender requirements, franchisor requirements, etc. In major metropol-itan areas and in shopping centres, it is common to have leases for retail spaces that are for 10 years or more. While, perhaps, this may not be as prevalent in smaller communities, even there, leases of 10 years (or more) can usually be negotiated for well-known franchise brands. (While there is no standard length of franchise agreement in the U.S., many franchise agreements have an initial term of 10 years.) Tenants often seek to incor-porate one or more option terms into their leases. Some fran-chisors, and some franchisees (if they are represented by knowl-edgeable counsel), will prefer to have the term of the franchise agreement (with any renewals) coincide with or be “cotermi-nous” with the term of the lease being entered into (including any options). Generally, there are no statutory rights regarding a commercial tenant’s or franchisee’s right to “hold over” at the end of the lease’s contractual term. In most instances, commercial leases contain provisions requiring the tenant to pay anywhere between 125% and 200% of the Base Rent and Additional Rent during any holdover period(s), although the amount of the overage, as is the case with most lease provisions, is usually subject to negotiation.

6 Governing Law


Many franchise agreements include choice-of-law provisions that establish the franchisor’s home state law as the governing law for the contract and any related disputes. For practical reasons, it is uncommon for a franchise agreement to be governed by a foreign franchisor’s local laws.

Choice-of-law provisions are generally enforceable as long as: (1) there is a substantial nexus between the chosen state and the parties or the transaction, or some other reasonable basis for the parties’ choice; and (2) the selection does not violate the public policy of the state with the predominant interest. However, the anti-waiver provisions of certain U.S. state franchise laws ensure that, no matter what the parties agree to in the franchise agree-ment, the local state franchise law will still apply. Other state laws specifically mandate that the local state’s franchise law protect franchisees within the state and override any choice of law provision.


A franchisor has the right under U.S. federal and state law to sue for injunctive relief where a franchisee has gone “rogue”. For example, a franchisor can seek an injunction under the Lanham (Trademark) Act and the Defend Trade Secrets Act of 2016 to protect its trademarks, trade secrets and confidential operations manual. Injunctions will usually only be granted where there is no adequate remedy at law and where a party would otherwise suffer “irreparable harm”. Most of the time, a franchise agree-ment that otherwise requires arbitration under its dispute reso-lution provision will carve out the right to seek injunctive relief in court. Certain arbitral forums also provide a mechanism to seek emergency relief.

There is no federal law or U.S. treaty that applies to injunc-tions issued abroad since, in general, there is no law regarding the recognition and enforcement of foreign judgments. Most states have adopted some version of the Uniform Foreign Money-JudgmentsRecognitionAct,buteventhatonlyconfersrecognition upon foreign money judgments. As such, local courts typically recognise and enforce final and valid foreign judg-ments in accordance with recognised principles of international comity. While U.S. courts have enforced foreign court orders for permanent injunctive relief, they have been less inclined to enforce preliminary injunctions issued abroad.


As codified in the Federal Arbitration Act (“FAA”), U.S. federal law considers arbitration a favoured means of dispute resolution.



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Prior to the emergence of the Coronavirus crisis (“Coronavirus Crisis”) the commercial real estate market was in the process of recovering from the “great recession” of 2008 through 2012. In certain metropolitan areas, the real estate market had recov-ered fairly well and it was not uncommon for landlords to charge premium rents for “Class A” and other desirable retail locations. Recent events however (prior to the Coronavirus Crisis) had created a concerning negative impact in the retail section of the U.S. commercial real estate market, due, in signif-icant part, to the impact that the purchase of products on the internet has had on retail sales generally, and inevitably, on the sale of products from franchised (or franchisor-owned) retail locations. According to a recent study by Aaron Smith and Monica Anderson, by 2015, approximately 10% of annual retail purchases, almost $350 billion, were purchased online. Further, almost 80% of Americans make purchases via the internet. This trend will likely continue and is likely to have an increasingly negative impact on “brick and mortar” retail purchases gener-ally, and on franchised retail outlets, specifically. Until the last recession, malls and shopping centres in the U.S. had experi-enced explosive growth since the 1950s. However, based on the internet’s continuing negative impact on retail locations (including franchised outlets), malls and shopping centres may well become smaller and rents may have to be reduced in order to induce retailers to make long-term commitments that both landlords and lenders desire or require. It is unlikely that we will see, in the foreseeable future, the kind of explosive growth that malls and shopping centres had previously experienced. We are starting to see retail space undergoing a major trans-formation, where the trend, generally speaking, has been that “low-quality” retail premises have been struggling and “high-quality” retail premises are more likely to be successful (espe-cially where consumers enjoy services and entertainment as opposed to buying durable goods which can easily be purchased “online”). This recent trend has helped to keep retail rents at more reasonable levels.

Partly as a result of these factors, reasonable construction periods (which vary depending on the location and type of work to be done), landlord contributions to tenant “work letters” and some “free rent” periods, are frequently available. In other areas of the country, including more suburban and rural areas, where the real estate market (and the local economies generally) have been, perhaps, more “hard hit”, it is even more common for tenants to obtain a period of free rent and/or tenant improve-ment allowances.

The specific work that the landlord agrees to do in order to prepare the premises for the franchisee/tenant’s occupancy is memorialised in a “work letter” which is almost always subject to negotiation. It will be influenced by such factors as the length of the lease term, the tenant’s credit worthiness and overall “desir-ability” and, of course, the rent to be paid. The time needed to perform both landlord’s and tenant’s work will vary according to the nature of the work to be performed, but will typically range from 60 days to six months and, sometimes, may be even longer where it is anticipated that particular zoning or “permit-ting” issues will apply. While no rent will be charged during the construction period, tenants frequently seek out an additional “free rent” period after the premises opens for business while still within the construction period and, in some cases, even after the construction period has ended. In certain areas, such as where a free-standing building is being constructed for the fran-chised unit, or for larger construction projects, such as hotels, even longer construction periods, and “free rent” periods, may come into play.

In certain metropolitan areas where the real estate market had recovered well, landlords would sometimes charge commercial


Yes, this concept is understood and is often addressed by contrac-tual agreement, both in the franchise agreement and, if properly negotiated, in the lease. Sophisticated landlords are generally aware that franchisors often reserve rights in their franchise agreements which will enable the franchisor, an affiliated entity or another approved franchisee, to “step-into” the franchisee/tenant’s shoes, either to temporarily operate the franchisee’s business (see commen-tary at question 16.2), or to take an assignment of the lease if either of two events occur: (i) the franchisee’s lease is terminated by the landlord; or (ii) franchisee’s franchise agreement is terminated by the franchisor. Some landlords will consent to such a requested lease term by so providing in a three-party rider or addendum to the lease, which is executed by the franchisor, franchisee/tenant and the landlord. Landlords will usually require that the franchisor (or other assignee) must cure any defaults (including the payment of any outstanding rent/additional rent, etc.) before the franchisor or another franchisee can take over the lease. Savvy franchisors or franchisees may negotiate a lease term providing that, under such circumstances, the landlord’s consent will be “deemed” to have been given and that the only requirement is that proper notice is provided to the landlord. Other landlords may resist agreeing to such a provi-sion outright, while others may seek to obtain financial concessions from the franchisor in return for agreeing to such a provision. For example, where landlords have required the franchisor or franchisee to provide either a full or partial guaranty of the lease (e.g., a “good guy” guaranty where the guarantor is responsible for all of the obli-gations under the lease for only such period of time that the tenant remains in possession of the premises), the landlord may require that a comparable guarantor be added (or substituted) as part of the trans-action. Whether or not the franchisee/tenant, as well as any guaran-tor(s), will be released from liability under the lease upon such a sale is also a key issue to be negotiated.


Typically, not in the franchise context. While U.S. federal law restricts foreign ownership of certain federal oil, gas and mineral leases, and authorises the blocking of certain foreign acquisitions of U.S. companies with respect to particular industries which potentially impact on national security, energy resources and crit-ical infrastructure, such restrictions are generally inapplicable to franchising opportunities in the U.S. Under federal law, foreign owners or investors in U.S. real estate are subject to U.S. tax to the same extent as domestic owners are. In most instances, foreign investors would acquire U.S. real estate interests, including leases, by utilising single purpose U.S. entities which are created specifi-cally in order to acquire or lease the real property.


The U.S. commercial real estate market is large and varied.


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care. Access to the online market can significantly impact the profitability of a franchise, and both franchisor and franchisee should be clear about their respective rights.

From an antitrust perspective (see section 3 above), there is no specific statutory restriction upon a franchisor’s limiting access by its franchisees to the online market (as might be the case in other countries). However, a franchisor’s failure to clearly define a franchisee’s rights with respect to online sales, espe-cially in its required disclosure documents and franchise agree-ments, may result in litigation, including claims by aggrieved franchisees that a franchisor has committed “disclosure” viola-tions (including violations of both federal and applicable state law), and common law claims for fraudulent or negligent omis-sion, breach of contract, and/or breach of the implied covenant of good faith and fair dealing. Further, franchisors should be cautious about employing new methods of online purchasing, or implementing requirements that online business be conducted through a national website, where existing franchise agreements may not have fully contemplated or delineated the rights of the parties with respect to online sales. Where online sales divert enough business away from a franchisee’s exclusive territory, or the franchisor has not specifically reserved its rights to compete with franchisees online, such changes could violate implied covenants of good faith and fair dealing, or potentially even state-specific franchise laws (see e.g. Wis. Stat. §1365.03 (fran-chisor may not substantially change the competitive circum-stances of a dealership without good cause); IN Code §23-2-2.7-1(2) (prohibitions against franchisor competing unfairly with franchisee, or within franchisee’s designated protected terri-tory);NJStat.§56:10-7(e)(franchisormaynotimposeunreason-able standards of performance)). Franchisors and franchisees alike should take care to properly delineate and understand how online commerce impacts a franchisee’s territory, and properly reflect it within their agreements.

In addition, with the onset of the COVID-19 pandemic, franchisors and franchisees alike have had to adapt their basic methods of conducting business. Governmental orders and mandates have in many instances limited the ability of busi-nesses to conduct “in person” commerce or have otherwise significantly altered customer interactions. Often, if a busi-ness is to survive, it must increasingly rely upon engaging in online transactions, whether it be entirely online, or to facil-itate the “contact-less” sale of goods or services. Franchise systems must be flexible, and franchisors and franchisees should work together to adapt to this new landscape, which will likely include significant re-working of online sales platforms and arrangements. Systems that do not adapt and work together may suffer the loss of many of their franchised units, and subject themselves to claims by franchisees for refusing to reasonably accommodate them in these new circumstances, including for breach of the implied covenant, impossibility, and frustration of purpose, regardless of what the FDD or franchise agreement may say. Like it or not, the prevalence and necessity of digital commerce has been advanced significantly due to COVID-19, and most franchised systems need to address how they will adapt to this increased usage of e-commerce, lest they ultimately be left behind as consumers become more reliant on e-com-merce in the future, or even be put out of business.


No. A franchisor may require (in its franchise agreement) that

tenants so-called “key money” as a premium for the tenant’s right to secure the lease. The pressure from internet sales has had a negative impact on this practice. In most cases, where key money is a factor, the deals usually involve transactions where an existing lease and infrastructure (e.g., built-in furniture, specialty plumbing or electrical work) are transferred to a new tenant and the landlord requests a one-time payment in recog-nition of the extra facilities and the convenience that the tenant is inheriting. Examples of this situation may include a restau-rant having a recently upgraded infrastructure in place, or where a petrol station having substantial equipment improvements is being transferred to a new tenant (petrol distributor). Unlike the residential context where tenants are sometimes asked to pay “key money” to superintendents or building managers in order to secure a flat (such “off the books” practices are illegal), in the commercial real estate market context, requests may be presented so long as the money is requested by the landlord and is paid by the tenant and set forth in the lease.

Impact of the Coronavirus CrisisPresently (the summer of 2020), the U.S. is still in the midst of the Coronavirus Crisis. In the spring of 2020, millions of American employees were unable to travel to their workplaces because state and local government authorities issued “stay at home” orders and ordered all “non-essential businesses” to “shut down”. While every state has begun to ease these restrictions in furtherance of “opening the economy”, recent “spikes” in the number of Coronavirus infections have caused many states to either “pause” or “roll-back” their “economy opening” plans. As a result of the Coronavirus Crisis, many retail locations and other businesses (including franchises) have defaulted on their leases and are trying to negotiate with their landlords to avoid being evicted from their premises (when existing eviction mora-toriums are lifted). Further, many larger businesses have been reluctant to require their employees to return to their offices, especially in urban areas. With the Coronavirus Crisis not yet under control and with health experts predicting that that the Coronavirus will continue for the foreseeable future, we believe that that there will a significant softening of the commercial real estate market in the U.S. through at least the end of 2021, espe-cially with respect to “Class A” retail and office space, both in urban and suburban areas.

8 Online Trading


Yes. The franchise agreement can regulate how online orders are allocated. However, a franchisor should take great care to adequately define in the franchise agreement and to disclose in the FDD (along with required state disclosure documents) how such online orders will be handled. Unless a territory is truly “exclusive”, franchisors should avoid words like “exclu-sive” territory in order to avoid confusion, and make sure that prospective franchisees are put on notice as to the manner in which online orders are handled within a franchisee’s territory.

As e-commerce continues to mature, prospective franchi-sees who are purchasing a franchise should review the territo-rial protections and online market provisions described in the FDD and provided for in the franchise agreement with great



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Virgin Islands) have so-called “relationship laws” which govern one or more substantive aspects of the franchisor-franchisee rela-tionship. Common examples include: restrictions on termina-tion, non-renewal, and/or transfer; limitations on the franchisor’s ability to open a new company owned or franchised unit in the vicinity of the franchisee’s location (“encroachment”); limits on post-term non-competition agreements; permitting “free associ-ation” among franchisees; requiring that a franchisor act in good faith or with reasonableness when dealing with its franchisees; and the inclusion of “non-waiver” provisions with respect to the state statute’s protections. Beginning in the 1970s, these rela-tionship statutes were enacted by state legislatures in an attempt to correct some of the significant perceived abuses that fran-chisors were committing against prospective and current fran-chisees. State relationship laws vary considerably, both in terms of the breadth of the issues that are addressed, and with respect to the specific provisions and restrictions which are contained within them. Some relationship laws are made part of the state’s franchise registration or disclosure statute, while others are set forth in a statute which is separate from the state’s disclosure/registration laws. Some states, however, have relationship laws but have enacted no franchise disclosure/registration law.

State relationship laws typically address (e.g., restrict) the fran-chisor’s ability to terminate or fail to renew the franchise. Most of them require a franchisor to have “good cause” (or “reason-able cause”) before it is permitted to either terminate or not renew a franchisee’s franchise. (Where applicable, such laws will over-ride and make unenforceable, inconsistent provisions contained in the franchise agreement. For example, a provision stating that the agreement will expire at the end of a particular term if the fran-chisee has no right to renew may be unenforceable.) While some relationship laws define “good cause” (or “reasonable cause”), others do not, leaving this determination to the courts. However, good cause generally exists if the franchisee has breached a mate-rial obligation of the franchise agreement. Typically, under rela-tionship laws, the franchisor is required to provide the franchisee with written notice (for example, between 30 to 90 days, which is often significantly longer in duration than what is provided for in the franchise agreement), within which the franchisee may cure the alleged default and avoid termination. However, in instances where the default involves the franchisee’s failure to pay monies owed to the franchisor, the permitted notice/cure period under relationship laws is often considerably shorter. Additionally, for certain defaults which are perceived to be egregious and/or which pose a threat to the well-being of the public or which are damaging to the franchisor’s brand, including, for example, posing a threat to the public’s health and safety (often, for example, in a food-related franchise), and/or are otherwise “uncurable” (for example, unau-thorised use of the franchisor’s registered trademarks), or where certain exigent circumstances are present (for example, the fran-chisee’s insolvency or bankruptcy or the franchisee’s loss of its right to occupy its premises), the franchisor is usually statuto-rily permitted to terminate the franchisee’s franchise agreement, either immediately, or with a much shorter notice/cure period than what might otherwise be required. As applicable relationship laws supersede whatever inconsistent provisions are contained in the franchise agreement, franchisors, and their counsel, need to be aware of any applicable relationship law when evaluating how to handle a franchisee’s default and/or potential termination.

Almost all franchise agreements provide that the franchisor may terminate the franchise if the franchisee becomes insolvent or files for bankruptcy. However, under the U.S. Bankruptcy Code, a contractual provision permitting the franchisor to termi-nate the franchise agreement in the event of the franchisee’s bank-ruptcy may not be enforceable (see 11 U.S.C §365(e)(1)(A)). If a franchisee files for bankruptcy before its franchise agreement

a franchisee utilise a specific domain name, and return usage of that domain to the franchisor after expiration of the fran-chise. It is advisable that a franchisor disclose domain name requirements within the FDD, and that the franchise agreement clearly set forth any post-termination requirements with respect to domain names. The ICANN regulates the usage of domain names, and franchisors may seek transfer of a domain name under ICANN’s UDRP proceedings to effectuate the transfer of a domain name. Where a franchisee’s domain utilises a franchi-sor’s protected trademark within the domain name, the UDRP is far more likely to require transfer back to the franchisor, even if a dispute arises (and the usage of a protected trademark in the domain name may give a franchisor additional Lanham Act claims). If the infringement involves a generic top-level domain (“gTLD”) and in clear-cut trademark infringement matters, ICANN’s newly adopted URS domain name suspen-sion procedure can be used to suspend infringing domain usage (but suspension of the infringing domain is the only remedy in a URS matter).

Given the above, franchisors should craft domain-specific provisions in their FDDs and franchise agreements with care and take steps to ensure they maintain control over their domain names. Franchisors may consider having franchisees agree in writing to transfer their domain rights to a specific domain at the time of termination of the franchise, or alternatively, control the rights to a specific domain themselves, and grant the fran-chisee a licence to utilise the sub-domain during the franchise relationship. Notably, if a franchisor does not take steps to timely effectuate the transfer of a domain name, or object to a former franchisee’s continued use of a domain in violation of an agreement, it opens itself up to laches, acquiescence and waiver arguments (see e.g. American Express Marketing and Development Corp v. Planet Amex et ano., NAF UDRP Proceeding, Claim No. FA1106001395159 ( Jan. 6, 2012) (the domain would properlystay with the franchisee, as the franchisor “acquiesced to the use of its mark in the Respondent’s domain name for at least a period of several years”)).

Franchisees should similarly be aware that if a domain name is the property of a franchisor, that any systems reliant upon that domain name may be abruptly discontinued at the end of a fran-chise agreement’s term, including any e-mail accounts, internal data and communications, associated online media content and contacts, and any other identifiers tied to that domain name. A termination could therefore result in significant business disrup-tion, including the loss of client contacts, and potentially years of e-mails and other domain-dependent communications and information. Counsel should examine relevant provisions in an FDD or franchise agreement carefully, so clients are fully aware of the implications of termination of the franchise upon domain-name usage, and potentially the ability of a business to continue functioning after de-identification.

9 Termination


Yes. While federal law in the United States, e.g., the Amended FTC Franchise Rule, governs the requirements with respect to how franchisors must provide proper disclosure to prospec-tive franchisees, federal law does not govern any aspect of the franchisor-franchisee relationship after the parties enter into a franchise agreement. However, almost half of all states in the United States (and U.S. territories of Puerto Rico and the U.S.


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The “joint employer” doctrine is a concept in employment law. It expands the definition of “employer” to include additional persons or entities that exert sufficient influence or control over the “terms and conditions” of employment (directly, or some-times, even indirectly), so that they will be considered a “joint” employer by law. Notably, the joint employer doctrine only applies in connection with, and is therefore limited to, violations of employment law (for example, violations of the Fair Labor Standards Act, 29 U.S.C. 201 et seq., or National Labor Relations Act, 29 U.S.C. §151 et seq. (“NLRA”)).

Applying the joint employer doctrine in the franchise context is troublesome, because the franchisor-franchisee relationship, by its very nature, requires a franchisee (and its employees) to adhere to the franchised system or business model, and to follow certain designated procedures. The hallmark of liability under the joint employer doctrine is the exercise of sufficient control over employees so as to be considered an employer. A franchisor may discover that by too closely regulating what the franchisee’s employees do, in trying to keep the franchise system uniform, it will be considered liable for employment law violations as a “joint employer”. Trouble areas include (but are not limited to) setting “required” work hours, mandating and controlling employee time-tracking software, becoming involved in employees’ wage and salary levels, training “line” employees, becoming involved in hiring or firing, setting employment practices and policies, and resisting the unionisation of employees.

In early 2020, multiple federal agencies issued the administra-tion’s new rules interpreting the joint employer doctrine, opining on when a franchisor might be deemed a “joint employer” with its franchisees (and thereby potentially jointly liable in the employ-ment context). The prior administration’s National Labor Relations Board (“NLRB”) had caused upheaval with its adop-tion of a new joint-employer standard stemming from a 2015 NLRB matter called Browning-Ferris Industries, whereby a fran-chisor could be considered a joint employer – even if it only exer-cised “indirect” control over a franchisee’s employees, or even if it sufficiently reserved the “ability to exercise such control”. Such indirect control was particularly troubling in the franchise context, as a franchised system, almost definitionally, must exert some degree of control over the operations of its franchisees. Multiple federal agencies followed suit. The present administra-tion had signalled it would scale back that new joint employment standard, but failed to do so until very recently.

This past year, the federal government acted to pull back from the Browning-Ferris standard. On February 20, 2020, the NLRB issued its new joint employer rule under the NLRA, which removed the prior “indirect” control language, and in relevant part states “the entity must possess and exercise such substantial direct and immediate control over one or more essential terms orconditionsoftheiremployment…”. Previously,onJanuary12, 2020, the US Department of Labor (“DOL”) similarly announced a new joint employer rule, which specifically stated that operating as a franchisor does not make joint-employer status more likely under the FLSA, and similarly rejected the more “indirect” control standard. As per a November of 2019 announcement, the US Equal Employment Opportunity Commission (“EEOC”) also announced that it intends to issue

and/or its lease has expired or has been properly terminated, such agreement(s) become(s) part of the debtor-franchisee’s (“debtor”) “bankruptcy estate”. However, the franchise agreement and/or lease may be terminated relatively quickly if the debtor (fran-chisee) files either a Chapter 7 “liquidation” or a Chapter 11 “reor-ganisation” but “rejects” the agreement(s) (e.g., consents to their cancellation). In the event that a debtor in a Chapter 11 reor-ganisation wishes to “assume” its franchise agreement or lease (i.e., keep it/them “in place”), it is unlikely that the franchisor will be able to quickly terminate these agreements provided that the debtor/franchisee was not in default of these agreements at the time the bankruptcy petition was filed. It is likely that the bank-ruptcy court will approve the assumption of these agreements if the debtor/franchisee is able to otherwise perform their respec-tive terms, the agreement(s) appear(s) to be in the best interests of the debtor’s bankruptcy estate and the assumption of the agree-ment(s) is supported by reasonable business judgment. However, if the debtor/franchisee was in default of its agreement(s) at the time that the bankruptcy petition was filed, it is more difficult for it to assume them. In this situation, the debtor will likely have to: (i) cure, or provide adequate assurance that the trustee will promptly cure such defaults; (ii) compensate, or provide adequate assurance that it will promptly compensate another party for any actual pecuniary loss that the party may suffer as a result of such default; and (iii) provide adequate assurance with respect to the future performance of such agreement(s).


Yes. As was discussed above in question 9.1, almost half of all states in the United States (and U.S. territories of Puerto Rico and the U.S. Virgin Islands) have so-called “relation-ship laws” which govern one or more substantive aspects of the franchisor-franchisee relationship, such as the franchisor’s ability to terminate or fail to renew the franchise. In addition to typically requiring the franchisor to have “good cause” (or “reasonable cause”) before it is permitted to either terminate or not renew a franchisee’s franchise, most relationship laws require the franchisor to provide the franchisee with written notice (within which the franchisee may cure the alleged default and avoid termination), which may be significantly longer in duration (e.g., between 30 and 90 days) than the “cure” period provided for in the franchise agreement. The reason for such provisions is to protect franchisees from having their liveli-hood (and often a large financial investment) taken away from them on short notice. Where applicable, such relationship laws will apply irrespective of the express notice provisions (and/or governing law and jurisdiction provisions) contained in the franchise agreement, and any such inconsistent provisions will be deemed unenforceable. While U.S. courts generally cannot “revive” or reinstate a franchise after the franchisor has termi-nated the franchise agreement, a franchisee who successfully asserts a claim that the franchisor violated an applicable rela-tionship law and improperly terminated the franchisee’s fran-chise agreement will be awarded appropriate damages, prejudg-ment and post-judgment interest as well as court (or arbitration) costs, including reasonable attorneys’ fees which were incurred by the franchisee in connection with the litigation or arbitration. Franchisors, and their counsel, need to be aware of any appli-cable relationship law when evaluating how to handle a fran-chisee’s default and/or potential termination.



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employees). However, vicarious liability, as a general rule, will only attach where a franchisor exerts so much control over the franchisee’s performance of the process or activity that is being complained of, that courts will find that the franchisor should be held responsible. The classic example is where a fran-chisor specifically mandates that coffee be served at a scalding hot temperature, they might find themselves vicariously liable if an ultimate franchisees’ customer burns themselves. Almost every jurisdiction has found that general operational manuals or enforcement of a franchisor’s general franchise system will not, by themselves, lead to vicarious liability. In contrast, where a franchisor has mandated a particular practice or policy that is directly responsible for the harm, there is a significant risk that vicarious liability will attach.

Franchisors need to balance their needs to provide guidance to their franchisees, including the promulgation of detailed poli-cies and procedures, against exerting so much control over the day-to-day operations of franchisees that they open themselves up to a risk of vicarious liability. Where detailed specific controls are not necessary to maintain quality control of the franchised system, they should be avoided. Franchisors can also seek to minimise potential damages by having an appropriate indemnity provision in their franchise agreement, as well as by requiring that franchisees maintain adequate insurance coverage, and naming the franchisor as an insured party, especially where necessary to protect against particular liability concerns.

In the current COVID-19 pandemic, vicarious liability should be carefully examined. Franchisors should take care that their system standards and operations manuals do not conflict with any federal and local laws, particularly with respect to pandem-ic-related governmental action. Where such conflicts might exist, the franchisor should make clear to its franchisees that federal and local laws will override any contractual mandates or system standards. Further, franchisors should re-examine all customer safety protocols, particularly in the food, entertain-ment, health and fitness, and hospitality sectors, and require at the absolute minimum that franchisees strictly adhere to federal and local health and safety guidelines. It probably would be prudent to include additional language in operations manuals and franchise standards (or amendments thereto) requiring each franchisee to take whatever steps are necessary to ensure the safety of their customers, with the means and method of doing so in the discretion of each franchisee, depending upon their locality, and the status of the virus. The failure to do this could conceivably lead to vicarious liability. While there have been some efforts to have liability waivers built into COVID-19-related aid packages for businesses, or otherwise to pass federal or local legislation limiting COVID-19 related liability for businesses, as of yet, none have been codified, and liability concerns should be contractually addressed. Franchise systems that depend upon customer presence within their facilities, such as gyms or health spas, may even want to consider waivers of liability by customers or members, so as to place the risk of transmission upon the customer or member, to the extent prac-ticable to permissible under the law.



There are no restrictions on the payment of royalties by a U.S.-based franchisee to a foreign franchisor, unless the overseas franchisor’s home country is subject to U.S. economic sanctions.

a similar proposed rule under the federal discrimination laws. Notably, although the risk of joint liability is greatly reduced, even under the newer standard a franchisor exercising direct and immediate control over essential terms and conditions of a fran-chisee’s employees can still become a joint employer. Therefore, even under the new federal rules, wherever a franchisor seeks to impose control over a franchisee’s employees, including in oper-ations manuals, or policies and procedures, franchisors should continue to be wary.

Although federal law now appears to be retreating from the prior administration’s more aggressive posture of finding fran-chisors to be potential joint employers, many state laws have not made this shift, and it remains to be seen if they will follow in the same path. Indeed, on February 26, 2020, the New York AG’s Office, along with 17 other states’ AG’s Offices, filed suit challenging the NLRB’s new standard in the SDNY, State Of New York et al v. Scalia, Index No. 1:20-cv-01689-GHW, and that matter is pending. Therefore, franchisors should consult with knowledgeable counsel, and exercise caution where some control over a franchisees’ employees may occur, particularly within the realms of wage and hour, labour relations, or other terms and conditions of their employment.

Franchisors should remember that the application of the joint employer doctrine is limited to issues within the employment context, and only really impacted those franchisors who directly – or indirectly (depending on the standard) – controlled the fundamental terms and conditions of their franchisees’ employ-ment relationships, or specifically became involved in oppo-sition to unionisation or collective bargaining with respect to their franchisees’ employees. Franchisors that do not seek to impose any significant control over the employees of their fran-chisees, especially in the labour relations arena, will significantly reduce their risk of being considered joint employers, or subject to NLRB scrutiny or NLRA liability.

Therefore, as of this year, the federal doctrine of “joint employ-ment” is still alive and well, but the new guidance has clari-fied that the standard has reverted back to a pre-Browning-Ferris one. However, state and local laws may apply different stan-dards, including more aggressive ones. Franchisors are well advised, wherever possible, to avoid exerting excessive control over the terms and conditions of employment of their franchi-sees’ employees, while balancing such needs against maintaining system standards. Franchisors can and should take prudent steps to help avoid being considered a joint employer. One good rule of thumb has been for franchisors to continue to maintain system standards and employee practices that have to do with the end product or service (sometimes called “control of outcomes”), but to make it their practice to distance themselves from directly engaging in setting policies or procedures regarding how a fran-chisee’s employees are managed in order to produce the end product or service (sometimes called “control of means”). For example, a franchisor of a sandwich shop can dictate in its “oper-ations manual” precisely how a franchisee’s employees must assemble and produce its sandwiches, but should not become directly involved in training, hiring, filing, or setting hours and pay rates for the low-level employees producing those sandwiches.


Franchisors have been found to be vicariously liable for the acts or omissions of their franchisees (or their franchisees’


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Many states, but not all, automatically incorporate by common law an implied covenant of good faith and fair dealing into every contract within their jurisdictions, including franchise agreements. A few do not, and a few only do so in limited non-franchise contexts, so it is important to analyse which state’s law applies in a given circumstance. Where it exists, the implied covenant of good faith and fair dealing typically means that where one party may be free to exercise its discretion, it should not do so in a manner that deprives the other party of the benefit of the contract. It should not enrich itself unfairly, or act in an overly arbitrary or capricious manner, so as to elim-inate the other party’s benefit of the bargain.

Generally, implementation of the implied covenant of good faith and fair dealing cannot conflict with an express contrac-tual term. Therefore, a well-drafted franchise agreement will usually address most significant issues with sufficient particu-larity to minimise the application of the implied covenant of good faith and fair dealing. However, issues do arise, espe-cially where the exercise of discretion is involved, and a fran-chise agreement is silent on the point in question. Further, good faith and fair dealing is a fact-driven analysis, and even well-drawn contracts may not anticipate every contingency. Therefore, where a franchisor wishes to retain the unfettered ability to make an important decision that may be to the signif-icant detriment of a franchisee, it is prudent for a franchisor to make clear that it has the absolute discretion to do so within the contract, and thereby avoid the inadvertent application of the implied covenant of good faith and fair dealing.

In addition, a franchisor must be confident that the contract term under which it wishes to exercise discretion is enforce-able. Even where a franchisor may be in a position to argue that an express term of a contract grants it absolute discretion to do something that negatively impacts a franchisee, there still remains a risk that an implied covenant of good faith argument could apply, especially if the contractual term the franchisor wishes to utilise or exercise is so one-sided as to be prohibited by statute, unconscionable, or otherwise void. See e.g. Michael D. Bryman, et al. v. El Pollo Coco, Inc., MC026045 (Cal. Super. Ct., L.A. Cty., Aug. 1, 2018) (jury verdict of 8.8 million against franchisor for violating implied covenant of good faith and fair dealing when franchisor placed competing units near franchisee, despite terms in franchise agreement that gave the franchisor that right; the court found those contractual terms unconscionable and void, and similarly found the conduct violated the CA Unfair Competition Law) (appeal pending). The lesson is that while contract law and a well-crafted agreement will do a great deal to insulate a franchisor from liability, they are not absolute shields, and the implied covenant of good faith and fair dealing may apply to prevent overreaching by a party that clearly deprives the other party of the benefits of the deal.

To be clear, requiring good faith and fair dealing is not the same thing as requiring a franchisor to sacrifice its own economic self-interest in favour of the franchisee. The El Pollo Loco case is an exception to the general rule in that parties are free to enter into contractual provisions as they wish, especially if both parties are sophisticated and represented by counsel.


Since royalty payments from a U.S. franchisee to a foreign fran-chisor are considered U.S. sourced income, a 30% tax is typi-cally deducted and withheld from the royalty payments (and paid directly to the IRS). If the U.S. has an income tax treaty with the franchisor’s home country, the royalties may be taxed at a reduced rate. The foreign franchisor does not gain an advantage by structuring the royalties as management service fees since such fees are also subject to the 30% withholding tax. However, the franchisor may try to negotiate a “gross-up” provision in the franchise agreement that requires a U.S. franchisee to make up the difference and pay at, or closer to, the full royalty rate.


No. It is standard for a U.S. franchisee to operate its business using the local currency. Major banks can usually wire franchise fees or royalties on behalf of a U.S. franchisee to the foreign fran-chisor using the franchisor’s foreign currency. Notwithstanding this however, it is typical for a foreign franchisor to conduct its franchise business in the U.S. either through a U.S. subsidiary or a master franchisee.



Yes, there is a risk that a franchisee will be deemed an actual (or apparent) agent of the franchisor and that the franchisor will be held vicariously liable for harm caused by the franchisee’s actions (or failures to act). In determining whether an actual principal-agent relationship exists, courts will look at the degree of control exercised by the franchisor over the franchisee’s general day-to-day operations and/or over the instrumentality of the harm. Courts may find apparent agency if an innocent third party: (a) reasonably believed, based on the franchisor’s representation, that the subject franchisee was an agent of the franchisor; and (b) reasonably relied upon that belief to its detri-ment. See also Section 10, JointEmployerRisk andVicariousLiability, supra.

To minimise risk, the franchisor should limit its day-to-day control over franchisees and do only what is necessary to main-tain brand integrity and ensure uniformity and consistency throughout the system. It is generally advisable to include in the franchise agreement: (a) a provision stating that the franchisee is an independent contractor and not an agent of the franchisor; (b) an indemnification clause; and (c) a provision requiring that the franchisor be listed as an additional insured under the fran-chisee’s insurance policy. The franchisor should require that its franchisees hold themselves out to the public as independent owners on all of their signage and advertisements.



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faithandfairdealing.Indeed,instatessuchasNJ(withtheNJFranchise Practices Act mandating “good cause” for termina-tion, and prohibiting holding franchisees to an “unreasonable standard of performance” – regardless of the express terms of a FA), such a course of action may already be mandated. The lesson is that these are unique times, and franchisors should be mindful that equitable arguments and mechanisms in the law requiring good faith and fair dealing are far more likely to be applied in these circumstances.



Franchise disclosure and registration laws only govern the fran-chisor’s actions prior to the offer and sale of a franchise; they do not regulate the conduct of the franchisor once a franchise rela-tionship has been established. Twenty-one states (along with Puerto Rico and the U.S. Virgin Islands) have enacted laws that govern the substantive aspects of the franchise relationship after the offering and sale of a franchise (“relationship laws”). The most recent state-level attempts (Florida in 2018 and Alabama in 2019) to pass relationship laws did not succeed. Relationship laws generally: (i) regulate the franchisors’ ability to terminate or refuse renewal of the franchise agreement; (ii) impose restric-tions on transfer; (iii) grant franchisees the right to form an asso-ciation with other franchisees in the same system; (iv) prohibit franchisors from discriminating against similarly situated fran-chisees without cause, including selective contract enforcement; (v) restrict or prohibit the franchisor from directly or indirectly (for example, through another franchisee) encroaching upon a franchisee’s territory; and (vi) obligate the franchisor to repur-chase inventory upon termination or non-renewal of the fran-chise. While the states’ franchise relationship laws vary, their common goal is to protect franchisees for the duration of the business relationship, from the unequal bargaining power that typically favours franchisors.

While there is no generally applicable federal franchise rela-tionship statute, there are federal and state laws that govern franchise relationships in specific industries, such as: gas station operations; automobile dealerships; hardware distributors; real estate brokerage firms; farm equipment machinery dealerships; recreational vehicle dealerships; and liquor, beer and/or wine distributorship. For example, under the Federal Petroleum Marketing Practices Act, gas station franchisors or refiners cannot terminate the relationship with franchisees without “good cause”. Good cause generally means that the franchisee has not “substantially complied” with the material terms of the agreement or has engaged in acts that have damaged the fran-chisor. Such acts, include, but are not limited to, the franchisee: (i) voluntarily abandoning the franchised business; (ii) becoming insolvent; or (iii) selling competing goods. If sufficient grounds for termination exist, some states may require the franchisor to provide the franchisee with notice of termination and give the franchisee an opportunity to cure such violations. In the event that a franchisor elects not to renew a franchise agreement, the franchisor (under certain circumstances) must either: (i) offer to buy the franchise, if the franchisee owns the gas station; or (ii) give the franchisee the opportunity to purchase the prem-ises from the franchisor, if the franchisor owns the gas station.

There are also 28 states that have unfair trade practice acts (referred to as “Little FTC Acts”) that grant “consumers” a private right of action if a franchisor engages in unfair trade

Either the franchisor or the franchisee may knowingly enter into an unfavourable economic arrangement, and if the contract is clear, the implied covenant of good faith and fair dealing will generally not be allowed to contradict the express terms of the agreement.

There are other exceptions to contract law which may require good faith conduct. In addition to common law “good faith” requirements, some states have franchise “relationship” statutes that require good faith conduct on the part of a franchisor (see franchise “relationship” statutes, discussed question 9.1, supra, and question 14.1, below). These specific state statutes can actu-ally override or void contractual language, and prohibit, amongst other things, unfair or inequitable conduct by a franchisor. Some even require “good” reasons for termination, regardless of what the franchise agreement may say. See e.g. MN Stat. §80C.14 (prohibiting unfair or inequitable conduct); NJ Stat. §56:10-7(e) (prohibiting the imposition of “unreasonable” standards of performance on franchisees); CA Stat. BPC §20020 (requiring a “good faith” reason for termination). Many of these “rela-tionship” statutes also contain “anti-waiver” provisions, which prohibit any attempt to waive or nullify their statutory protec-tions through contractual language. SeeNJStat.§56:10-7(a)(anti-waiver provision). Additionally, a franchisor’s conduct, if it is sufficiently unfair, may become “unfair and deceptive” under other statutes (such as the FTC Act, discussed supra in section 3, and analogous state “Little FTC Acts”, see §9.1 supra).

While there may not be a blanket requirement in the United States that a franchisor conduct itself at all times with fairness and reasonableness, there are significant economic factors that also decidedly tilt towards treating franchisees fairly. Franchise systems that take unfair advantage of their franchisees may find themselves unable to sell new units if their franchisees are unsuccessful or unhappy. In the highly competitive United States franchise marketplace, negative reviews by franchisees can have a significant impact upon franchisors, especially since franchisors must disclose (in their FDDs) when their units close or fail. Therefore, while there may not be a legal requirement to act fairly and reasonably in every instance, franchisors should think carefully before putting immediate economic gains before the long-term health of the system, or exercising a right in a way that may put a franchised unit out of business.

Franchisors should be especially cautious in the current climate of the COVID-19 pandemic of violating the implied covenant of good faith and fair dealing. Under a normal economic climate, requiring a franchisee to comply with certain provisions, or to strictly maintain system standards, generally would be well within the orbit of a franchisor’s rights. However, in the context of COVID-19, franchisees may be required to conduct busi-ness in accordance with emergency rules and regulations (e.g. governmental action requiring deviation from system standards, hours of operation, staffing requirements, etc.). Franchisees are also facing unprecedented economic pressure (making it impos-sible to timely pay fees, or strictly comply with contractual obli-gations). Therefore, the blind use of a discretionary right by a franchisor to default or terminate a non-compliant franchisee may give rise to potent claims under the implied covenant of good faith and fair dealing. While it will take a little time for such cases to begin to work their way through arbitration and the courts, franchisees facing COVID-19-related issues may have much better arguments excusing non-compliance, and will likely appear very sympathetic to a finder of fact if they were treated unfairly during this pandemic. Where franchisors may have the right to exercise discretion, it may be the prudent course of action to instead try and work with a franchisee, rather than default or terminate a franchisee. Otherwise, a franchisor may risk a claim of breach of the implied covenant of good


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restrictions (e.g., California). While the goal of these relation-ship laws is to protect franchisees from the arbitrary termination or non-renewal of the franchise relationship, the side effect is the possible creation of a perpetual franchise relationship which may go against the franchisor’s intent. Note – the franchisee can always choose not to renew.


Franchisees are generally not entitled to compensation or damages because a franchisor has refused to renew the franchise agreement. This may not be the case, however, where the fran-chisor breaches a contract provision pursuant to which the fran-chisee has a right to renew its agreement or where a franchisor violates a state relationship law that restricts a franchisor’s right to refuse to renew a franchise agreement, as described in ques-tion 15.2 above. In addition, some states have franchise rela-tionship laws that require franchisors to repurchase a fran-chisee’s business assets, under certain circumstances. In Iowa, for example, a franchisor must repurchase the franchisee’s assets at fair market value as a going concern. In Washington, fran-chisors must compensate franchisees for goodwill, unless the franchisor agrees (in writing) to not enforce the non-competi-tion provision. In Arkansas, Hawaii and Washington, the fran-chisor is obligated to repurchase the franchisee’s inventory, supplies, equipment, and furnishings; while in California, the franchisor is only required to repurchase the franchisor’s inven-tory. Hawaii requires that the franchisor repurchase inventory from the franchisee upon termination of the franchise agree-ment, whether or not termination was for good cause.



Yes. Franchisors typically provide in their franchise agree-ment that franchisees are not permitted to transfer or assign any interest in the franchise agreement (or in the ownership interest in the franchisee) without the prior written consent of the fran-chisor. Franchisors in the U.S. are permitted to impose reason-able restrictions or “conditions” in connection with a proposed transfer of the franchised business. Examples of such conditions typically include: (a) requirements imposed on the existing fran-chisee (e.g., being current on all of its financial obligations to the franchisor, not being in default of the franchise agreement, the payment of a transfer fee, and the delivery of a general release in favour of the franchisor); and (b) requirements imposed on the transferee franchisee (e.g., entering into the franchisor’s “then current” franchise agreement, meeting certain financial criteria, and completing the franchisor’s required initial training programme).

Many franchisors also provide in their franchise agreement that they will have a “right of first refusal” with respect to proposed transfers of the franchised business to third parties. This right is frequently waived by franchisors as they are not usually interested in “taking over” additional locations which are in their system by purchasing them at fair market value. However, as many franchisors will not waive their right of first refusal “up front” (e.g., before a deal between the fran-chisee and prospective transferee is negotiated), the fact that

practices. Under these Little FTC Acts a violation of the federal FTC Act or related regulations, including the FTC Franchise Rule, constitutes an automatic violation of the state Little FTC Act. Lastly, U.S. courts have generally upheld applying the implied covenant of good faith and fair dealing, found in standard commercial contracts, to franchise agreements as well.

Since relationship laws vary, it is essential to determine which state’s relationship laws apply. Most states, though not all, address jurisdiction in their relationship laws. Among the states that address the jurisdictional application, some apply jurisdic-tion more broadly than others. Some states require the fran-chised unit to be located in its state for its relationship laws to apply. Other states apply a broader scope, allowing its relation-ship laws to apply if the franchisee is a resident of or is domiciled in the state, while others apply an even broader scope.



Typically, a franchisee’s right to renew its franchise agree-ment is contractually conditioned on a number of factors, most typically, the franchisee being in compliance with its obliga-tions during the initial term and its executing the franchisor’s then-current form of franchise agreement. Often, the fran-chisor’s then-current form of franchise agreement may contain terms that are materially different from the terms of the fran-chisee’s existing franchise agreement. Under the FTC Franchise Rule, if the renewal franchise agreement contains materially different terms, then the franchisor must adhere to the pre-con-tract disclosure requirement and provide the renewing fran-chisee with its then-current FDD. If the franchisee must sign a new franchise agreement upon renewal or if there is an interrup-tion or change to the franchisee’s business, then the franchisor must comply with any applicable FDD registration and disclo-sure requirements. If none of these conditions exist at renewal, then no disclosure is required under the FTC Franchise Rule.


States generally acknowledge parties’ freedom to set the terms for renewal or extension of the franchise agreement as the parties deem appropriate. However, since the scale of bargaining power is tipped in the franchisor’s favour, the freedom to contract is not absolute. Some states have franchise relationship laws that restrict a franchisor’s ability to refuse to renew a franchise agree-ment. The restrictions on refusing renewal differ state by state, with some states requiring that the franchisor: (i) have “good cause” or “just cause” for its refusal to renew (e.g., California, Connecticut, Hawaii, Illinois, Indiana, Michigan, Minnesota, Nebraska, New Jersey, Rhode Island and Washington); (ii)provide franchisees with at least 90 days’ (e.g., Delaware, Mississippi and Missouri) and, in some cases, six months’ (e.g., in Connecticut where the non-renewal is based on a determination to not continue to lease property to the franchisee) prior notice of the franchisor’s intent to not renew the franchise agreement; (iii) repurchase the franchisee’s assets (e.g., Arkansas, California, Connecticut, Hawaii, Maryland, Rhode Island, Washington and Wisconsin); and/or (iv) waive any post-term non-competition



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using the brand’s trademarks for unauthorised purposes or being found guilty of a felony or crime of moral turpitude. Such “step-in” provisions, which must be disclosed in the franchisor’s offering prospectus (FDD) given to prospective franchisees, are typically provided for in the franchise agreement and are gener-ally enforceable. Where the franchisee is going to be leasing the franchised business premises (as in most cases), the fran-chisor should require that the franchisee enter into a “Collateral Assignment of Lease” agreement (typically, a three-party agree-ment between franchisor, franchisee and the landlord) which will provide for the various circumstances in which the fran-chisor will be permitted to assert its “step-in” rights. If such an agreement is entered into (or the landlord otherwise consents in writing, such as in a lease rider or lease amendment), the fran-chisor will likely be able to enforce its “step-in” rights, including the right to take an assignment of the franchisee’s lease.

While there are no registration requirements or formalities that must be complied with in connection with a franchisor’s enforcing “step-in” rights (other than complying with “notice” requirements contained in the franchise agreement), the franchisee and/or the landlord (if no “step-in” rights have been provided for in a lease rider or amendment) may object to or seek to frustrate the fran-chisor’s attempts to assert “step-in” rights. In such case, the fran-chisor would usually not be permitted to use any form of “self-help” (under governing state law) and it is likely that it would be forced to seek injunctive relief in the courts. Where the franchisee files for federal bankruptcy protection before a franchisor tries to enforce its “step-in” rights, the bankruptcy filing typically results in the triggering of an “automatic stay” under bankruptcy law which will initially protect the debtor/franchisee. Under those circumstances, the franchisor would have to petition the bank-ruptcy court to seek to enforce its “step-in” rights. However, this process could take several weeks or even months.


Franchisors do not generally use basic powers of attorney in attempting to enforce “step-in” rights which are provided for in the franchise agreement. Rather, as explained above at ques-tion 16.2, franchisors often use a “collateral lease assignment” in order to protect and enforce their “step-in” rights. However, franchisors do commonly use agreements which appoint the franchisor and perhaps “any officer or agent of franchisor” as attorney-in-fact (e.g., holder of a power of attorney), in connec-tion with providing for the orderly (and peaceful) transfer of certain assets of the franchised business which the franchisor believes that it has a right to retain after the franchisee no longer operates the franchised business. These include such assets as telephone numbers, fax numbers, and internet domain names, etc., used by the franchised business. These issues typically arise in the context of an involuntary transfer or termination of the franchised business (as opposed to an approved transfer of the franchised business which is requested by the franchisee, where the approved transferee will continue operating the business). Such agreements authorising the franchisor to take such action as “attorney-in-fact” are generally enforced.

the franchisor has the “right of first refusal”, sometimes has a “chilling effect” on the franchisee’s ability to sell, because the proposed purchaser must spend considerable time, effort and money negotiating the deal with the franchisee, entering into an agreement only to find that “its” deal has been usurped pursuant to the franchisor’s “right of first refusal”.

Several state relationship laws impact on a franchisor’s ability to impose restrictions on the franchisee’s ability to transfer its business. For example, some relationship laws provide that it is an unfair or deceptive act for a franchisor to refuse to permit a transfer without having “good cause”. Others permit a fran-chisor to reject a proposed transfer if the transferee fails to satisfy the franchisor’s then-current requirements, as long as the franchisor’s refusal is not arbitrary. Other relationship laws require the franchisor to provide a timely response to a franchisee’s request to transfer and if the franchisor denies the request, it must provide the franchisee with a “material” reason for the rejection, such as the proposed transferee’s failure to meet the franchisor’s standard requirements relating to finan-cial ability, business experience or character. Some relation-ship laws provide that in the event of the death or disability of the franchisee (or franchisee’s principal, if franchisee is an entity), the franchisee’s spouse or heirs will have a reasonable time and opportunity to elect to operate or own the franchised business, so long as the spouse or heir satisfies the franchisor’s various then-current standards and requirements for operating the franchise.


Many franchise agreements in the U.S. contain provisions which provide that the franchisor, under certain circumstances, has a right to “step-in” and take over the operation and management of the franchised business. This may be for a limited period of time, for example, where a principal owner passes away and the franchised business has no manager in place to properly manage the business or where the business has been experi-encing operational difficulties. (If this occurs, and where the franchise agreement provides that the franchisor may operate the franchised business “for the benefit of the franchisee”, the franchisor may do so and will typically have the right to retain an agreed upon “management fee” for its services.) The fran-chisor may also have the right to declare that it is terminating the franchise agreement. If this occurs, it is common for the franchise agreement to require the franchisor to purchase the assets of the franchised business pursuant to a defined formula, which formula may often provide for the purchase of assets for less than market value. However, if a state relationship law is applicable, it may call for a more favourable result for the fran-chisee and would likely override any less favourable provision contained in the franchise agreement. Reasons for asserting such “step-in” rights, whether “short term” or a result of termi-nating, include where a franchisee is failing financially, has abandoned the franchised business, or where the franchisee (or its principal(s)) has engaged in egregious conduct which is likely to negatively affect the brand’s reputation or good will. This may include the franchisee knowingly defrauding the franchisor,


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but, for any naysayers who continued to believe in the enduring importance of the in-store experience, the Coronavirus pandemic has forced us all to acknowledge the massive changes which have resulted from “e-commerce”. Before the pandemic, when the consumer economy was thriving, “brick and mortar” retail stores were already facing a significant decline in sales due to intense competition from their e-commerce rivals. In some cases, retail stores had collapsed under the weight of their often-high commercial rent obligations. Now, during the first few months of the pandemic, many retail stores across the United States have been closed (or forced to operate with significant restrictions), causing a dramatic upheaval on the economy in general, and on franchising in particular. While businesses have started to re-open this summer (2020), some states are seeing spikes in the number of people infected with the Coronavirus and are pausing their “business opening” timeframes. All busi-nesses, including those run by franchisors, are beginning to re-think their commercial footprints and many franchised busi-nesses are exploring both how they can maximise the use of their retail locations as well as other avenues by which they can sell their products or services.

Franchised businesses have had to adjust, and must continue to adapt, to the new public health and economic reality in order to reach customers in their homes instead of in their locations. The restaurant industry has had to adjust its business model to one focused on a takeout-styled menu and delivery services. Fitness and gym franchises, which have been closed for several months across the U.S. and which typically require a large prem-ises and expensive equipment, have been particularly hard hit. In a move to retain members, virtual workout sessions have been introduced by many fitness and gym businesses during the pandemic. In the short term, these and other adaptations (to maintain social distancing) will be necessary for franchise systems to remain in business and to continue to be relevant in the current virtual marketplace. As to whether or not these and other changes reflect a paradigm shift in consumer behaviour and in franchise business models and operations, will depend, in part, upon the duration of the pandemic and the degree to which consumers are satisfied with the new offerings.

Franchised businesses have been forced to re-evaluate their outreach and marketing approaches to customers who have always worked in the city and who are now largely homebound. Many employees have lost their jobs due to the sudden contrac-tion of the economy during the pandemic. Those employees who have been fortunate enough to keep their jobs have often been asked or required to work remotely from home. Millions of Americans used to commuting to cities each day for work, now find themselves working instead from their own home-of-fices and bedrooms.

For many franchise systems, the pandemic will test the rela-tionship between franchisors and franchisees. To ease their financial burden, franchisees are seeking temporary assis-tances from their franchisors in the form of reductions or defer-ments in royalty fees and advertising contributions payable to the franchisor. Many franchisors have also been struggling as their revenue streams (e.g., the flow of royalty payments) have declined significantly. The degree to which franchisors and franchisees communicate their needs to one another and work with each other in a collaborative way as they navigate the disruptive changes to the economic environment will have a large impact on the success of franchise brands and their ability to appeal to their customers and prospective franchisees going forward.

As many franchised businesses are “small businesses”, a large number of them have applied to the U.S. government for loan relief under the Coronavirus Aid, Relief and Economic Security



In 2000, the United States Congress passed the Electronic Signatures in Global and National Commerce Act (“ESIGN”), confirming that electronic signatures have the same legal status as “wet ink” signatures. In order to be a valid electronic signa-ture, it is essential that, among other things: (i) each party intends to sign the document; (ii) the signature must be associated with the applicable document; and (iii) in certain consumer situations, the contracting parties must consent to do business electroni-cally. ESIGN pre-empts state laws regarding electronic signa-tures whenever inconsistent to do so. ESIGN does not mandate the use of electronic signatures, but it affords parties the option.

If the franchise agreement is a deed, further formalities such as needing to be executed in front of a witness are required. The witness must be present to witness the signing of the document, and there is no current authority on whether the requirement that the witness be present to see the signing can be satisfied by virtual means under normal circumstances. However, in the COVID-19 era, many states have temporarily allowed, through executive orders, for the remote witnessing of deeds and for counterpart signatures. While best practices would usually suggest that the franchise agreement be signed in “wet ink”, so that the witnessing of the signature is less able to be challenged, it is vital to research each state’s current laws, to explore what options are available.


A franchise agreement that is currently in effect must be retained in either electronic or hard copy for the duration of the contractual term. Once expired, best practices and Internal Revenue Service guidelines recommend a retention period of 10 years. Franchisors also must retain a copy of each materially different version of their FDD and also a copy of the signed receipt, both for at least three years after the close of the fiscal year when the documents were last used. Many states impose similar, if not stricter, requirements.

Franchisors should also maintain e-signed or “wet-ink” copies of executed franchise agreements even if they have been scanned and saved. While many states allow for such docu-ment retention to be digital rather than “wet ink”, and the FTC Franchise Rule does not specify a preference, it is prudent to keep “wet ink” versions of these important documents. From an evidentiary perspective, a “wet ink” version provides the best evidence in the event a dispute arises.



The internet-based economy has been with us for some time,



Franchise 2021

AcknowledgmentsThe authors would like to thank Avi Strauss, Shmuel Winiarz, and Dennison Marzocco for their invaluable contribution to the writing of this chapter. Avi is an Associate at the firm whose practice includes litigation and alternate dispute resolution matters such as arbitration and mediation, primarily involving franchise and other business-related disputes (email: [email protected]); Shmuel Winiarz is an Associate at the firm prac-tising primarily in the litigation field (email: [email protected]); Dennison Marzocco is a transactional Associate at the firm engaged in a diverse range of business transactions, including franchise matters, contracts, intellectual property, business formation, and commercial leasing transactions (email: [email protected]).

(“CARES”) Act’s Paycheck Protection Program (“PPP”). The PPP loan programme provides qualifying small businesses with potentially forgivable loans that must be used to pay payroll costs and to maintain their staff, but which also can be used to pay rent and utility bills. This loan programme, together with other loan programmes offered by the federal government (such as the Economic Injury Disaster Loans programme) as well as by state and local governments, have helped franchises (so far) survive during the worst period of the pandemic while they were either ordered to be closed by their state government or forced to operate under significant restrictions.

Richard L. Rosen, the founder of Rosen Karol Salis, PLLC, has been actively engaged in the practice of franchise law in New York City for over 40 years, during which time he has represented countless franchisors and franchisees, both as counsel and as a business adviser. Mr. Rosen has been engaged in virtually all aspects of franchising during his career. He has counselled and represented franchisors in the setting up of franchising systems and programmes, formed franchising entities, drafted and negotiated franchise agreements, multi-unit area develop-ment agreements, master franchise agreements, registration statements, disclosure and other ancillary franchise documents; represented franchisees and franchisee associations; litigated in both state and federal courts; and mediated, arbitrated and litigated matters on behalf of both franchisors and franchisees. He has represented franchisors and franchisees in essentially every field.Mr. Rosen is a founding member and immediate past chairman of the Franchise, Distribution and Licensing Law Section of the New York State Bar Association, a member of the Steering Committee of the National Franchise Mediation Program, The CPR Institute For Dispute Resolution Distinguished Panel of Neutrals and the Chairman of the AAFD’s Fair Franchising Standards Committee. He has frequently lectured on a variety of franchise topics before various groups and has been interviewed on both television and radio, the American Bar Association Journal, the Franchise Times, The Wall Street Journal and Forbes Magazine, regarding franchising. Mr. Rosen is a contributor to “Franchising 101, The Complete Guide to Evaluating, Buying and Growing Your Franchise Business” compiled by the Association of Small Business Development Centers, and has written many articles on the legal and business aspects of franchising. Mr. Rosen and his firm are the authors of the section on Franchise Law in the United States which appears in the third, fourth and fifth editions of the (international) Franchise Law Review as well as the review of franchise law in the U.S. which appears in the 2017, 2018, 2019 and 2020 editions of International Comparative Legal Guide – Franchise and the soon to be published Lexology Guide to Franchising in the US (New York and New Jersey).Richard has been listed in Who’s Who in America for over 30 years (and has recently been chosen to receive its Lifetime Achievement Award), Who’s Who in American Law, Who’s Who in the World, Best Lawyers in America, “101 Best Franchise Lawyers in America” (the Franchise Times), the Franchise Times “Hall of Fame” of Franchise Attorneys (charter member), Chambers, Best Lawyers in the U.S., America’s Super Lawyers, Who’s Who Legal: Franchise and The International Who’s Who Legal (Compendium Edition), The International Who’s Who of Business Lawyers and a recipient of the Global Award for Franchise Law. Richard and Rosen Karol Salis, PLLC were named Best (International) Franchise Attorney / Law Firm, 2020, by Global Franchise Magazine. In 2016, 2017, 2018, 2019 and 2020, Richard was chosen as Franchise Attorney of the Year for the U.S. by Lawyer Monthly. Richard was chosen as Franchise Attorney of the Year for the U.S. in 2017, 2018 and 2019 by Global 100. Richard Rosen was named Franchise Lawyer of the Year in the United States by Intercontinental Finance and Law in 2017, 2018, 2019 and 2020. In 2018, 2019 and 2020 Richard was named one the 100 Best Attorneys in the World by LegalComprehensive.com.

Rosen Karol Salis, PLLC110 East 59th Street, 23rd FloorNew York, NY 10022USA

Tel: +1 212 644 6644Email: [email protected]: www.richardrosenlaw.com


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John A. Karol joined the firm in 2010 and has been a partner since 2014. Mr. Karol practises litigation, arbitration, mediation, franchise and intellectual property law and employment law. Mr. Karol has litigated and arbitrated many franchise-related disputes, for both franchisees and franchisors. Mr. Karol has worked with Mr. Rosen on a wide variety of franchise-related, commercial, trademark and intellectual property matters and has represented many employers and employees in various employment-related matters. Mr. Karol has several significant reported decisions, including decisions concerning the NY Franchise Sales Act and its potential application against individual officers and directors, enforcement of arbitration provisions, and spoliation of evidence (ESI). Mr. Karol graduated from Fordham Univ. School of Law in 2002 and is admitted to practise in New York, New Jersey, the 9th Circuit, and the United States District Courts for the SDNY, EDNY, DNJ, DMI. He is a member of the NYSBA (Business Law Section’s franchise committee), and the NYC Bar Association.

Rosen Karol Salis, PLLC 110 East 59th Street, 23rd FloorNew York, NY 10022USA


Franchise 2021

USA

Leonard S. Salis, a Brooklyn Law School graduate with 23 years of legal experience, has worked closely with Richard Rosen since August 2002, becoming a partner in the firm in 2010. Leonard has acquired an extensive knowledge of franchise law and franchise-related matters, as well as significant experience in corporate law, real estate and dispute resolution. In 2020, Leonard was featured in Marquis Who’s Who Top Lawyers. In 2019, Leonard was awarded the Albert Nelson Lifetime Achievement Award from Marquis Who’s Who and was listed in the 2019 edition of Marquis Who’s Who. Leonard is admitted to practise law before the courts of the State of New York, the Southern and Eastern Federal Districts of New York and the 2nd and 9th Circuit Courts of Appeals. He is a member of the American Bar Association’s Forum on Franchising, as well as the New York State Bar Association (Business Law Section), the Association of the Bar of the City of New York and New York County Lawyers’ Association.

Rosen Karol Salis, PLLC110 East 59th Street, 23rd FloorNew York, NY 10022USA


Rosen Karol Salis, PLLC (formerly known as The Richard Rosen Law Firm, PLLC) and its predecessors have been providing high-quality legal services in the franchise field for over 40 years from their offices located in New York City. Our firm has represented franchisees, franchisors and franchisee organisations in virtually all areas of franchise law, from setting up fran-chising systems and programmes, forming all entities, drafting and nego-tiating (on all sides) franchise and multi-unit development agreements, disclosure and other ancillary documents, to mediating, arbitrating and liti-gating in both state and federal courts. Our firm negotiates leases, agree-ments for the sale or acquisition of franchise-related real estate, financing documents and handles all matters applicable to franchise transactions. We have represented franchisors and franchisees in virtually all fields, including restaurants, real estate brokerage, healthcare, fast food, fitness, energy, hospitality, education, health and beauty, telecommunications,

senior care, courier services, apparel and many more. Rosen Karol Salis, PLLC is highest rated by Martindale Hubbell and amongst franchise law firms in the U.S. In 2018 and 2019, we were named Franchising Law Firm of the Year in the USA by Lawyers Worldwide Awards Magazine.

www.richardrosenlaw.com


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