[ Exclusively for: Mariana Marques | 17-Feb-14, 02:27 PM ] ©The Law Reviews

THE

FRANCHISE

LAW REVIEW

EDITOR

MARK ABELL

LAW BUSINESS RESEARCH

THE FRANCHISE

LAW REVIEW Reproduced with permission from Law Business Research Ltd.

This article was first published in The Franchise Law Review, 1st

edition (published in February 2014 – editor Mark Abell).

For further information please email

nick.barette@lbresearch.com

THE

FRANCHISE

LAW REVIEW

Editor

Mark Abell

Law Business Research Ltd

Chapter 15

BRAZIL

Cândida Ribeiro Caffé, Rafael Atab de Araujo, Mariana Reis Abenza, Fernanda Souto Pacheco and Juliana Bussade Monteiro de Barros

1

I INTRODUCTION The Brazilian franchising market is growing at a rate of 16.2 per cent annually and

currently comprises approximately 2,426 franchise networks, generates around

940,887 direct jobs and annual revenues of US$51.134 billion and has achieved an

advanced level of maturity and reliability on a global scale. Brazilian native brands

represent around 93 per cent of the networks in operation. The maturity of franchising in the country, along with the strengthening of

Brazil’s social, political and economic environment, has resulted in strong interest

from foreign brands in the internal market and also incentivised local brands

towards the expansion into international markets. Currently 168 international franchise networks operate in Brazil. This still

represents only 7 per cent of the operating franchises in Brazil, although there is a

growing interest in the Brazilian market, bearing a strong domestic demand of more

than 190 million people, augmenting the volume of prospecting companies. Additionally, there are currently 112 Brazilian franchised trademarks

operating in 53 foreign countries. This number represents a 140 per cent increase

during the last five years. The Brazilian Franchise Association (ABF) estimates that

120 new trademarks will have started their operations abroad by the end of 2013. A special partnership between ABF and the Export and Investments Promotion

Agency (APEX-Brasil), a government agency of the Development Ministry, was

established to promote and stimulate the export of Brazilian franchises. Jointly with 1 Cândida Ribeiro Caffé and Rafael Atab de Araujo are partners, and Mariana Reis Abenza,

Fernanda Souto Pacheco and Juliana Bussade Monteiro de Barros are attorneys at

Dannemann Siemsen Advogados.

173

Brazil

the initiative of entrepreneurs, cooperation of law firms and other collaborators, this

partnership has contributed to the expansion of the Brazilian franchises overseas. Founded in 1987, ABF is a non-profit entity that has as its objective the

contribution to, promotion of and striving for technical and institutional development of

the franchise system. With its national headquarters located in São Paulo and with a

branch in Rio de Janeiro, ABF has been establishing itself as the most representative

entity for the sector at the federal government, other administrative spheres, official

national and international entities. It also has more than 1,000 members including

franchisers, franchisees, consultants and sector service providers. The entity participates

in the Ministry of Development, Industry and Foreign Trade’s (MDIC) Project for the

Elaboration of the Economic Development Plan.

II MARKET ENTRY i Restrictions Brazilian law does not impose any specific restrictions on foreign franchisors

granting franchises in Brazil. The only requirement is that the franchised

trademarks are at least filed at the National Institute of Industrial Property (INPI). There is no previous requirement of local registration of the franchisor entity

or the franchise template documents. However, as will be further explained below,

foreign franchisors need to comply with certain applicable local laws. With few exceptions, foreign franchisors can own equity interest in Brazilian

companies, provided that they appoint an individual resident and domiciled in

Brazil as their attorney-in-fact, with powers to receive summonses on their behalf

and manage their equity participation, among others. Any foreign partners or shareholders in a Brazilian company must previously

obtain their registration with the National Taxpayer Registry for Corporate Entities

or the National Taxpayer Registry for Individuals, as the case may be, as well as

with the Brazilian Central Bank’s electronic registration system (CADEMP). Certain sectors have specific restrictions to the participation of foreign

investors, such as health services; coastal shipping; media companies; cable TV;

mining/hydraulic energy; rural allotments in frontier areas; nuclear energy; public

air services and the aerospace industry. In general terms, a foreign franchisor is allowed to own real property in

Brazil provided that it is not a rural land or a border area, in which cases certain

conditions set forth in specific legislation shall be observed and authorisation from

Congress is required. ii Foreign exchange and tax Taxation on royalties paid under cross-border franchise agreements is as follows:

Withholding income tax (IRRF) The franchisee shall collect IRRF on behalf of the franchisor, although the financial

burden for such tax may be contractually shifted. The tax is levied on a general tax rate

174

Brazil

of 15 per cent of net revenues, which may be higher or lower depending where the

franchisor is resident or domiciled. Contribution for intervention on public domain (CIDE) CIDE is due and payable by the franchisee and calculated on the royalties paid to

franchisor at a 10 per cent tax rate over the amount remitted. Contributions for the social integration programme and for financing the social

security system (PIS-Import and COFINS-Import) There is a question as to whether such tax applies to international franchising. PIS-

Import and COFINS-Import are contributions payable by the franchisee, and are

calculated on royalties paid to franchisor, before IRRF, increased of the service tax

(ISS) and the contributions themselves. In general, the applicable rates are 1.65 per

cent and 7.6 per cent, respectively. If the master franchisee adopts the actual profit

method to determine the corporate income tax (IRPJ) and the special contribution

on net profit (CSLL), a tax credit of the same amount of PIS-Import and COFINS-

Import may be granted to the master franchisee in order to offset debt relating to

contributions levied on revenues. Service tax (ISS) Again, whether such tax applies to international franchising is not explicitly stated.

According to the Brazilian Tax Law, franchise agreements are treated as service rendering,

and so royalties paid to local or resident franchisors are subject to the levy of ISS. The

taxpayer of ISS is the franchisor, and if it is a non-resident, the master franchisee shall

withhold this tax in a very similar way as the IRRF. The applicable tax rate ranges between

2 and 5 per cent, depending on the municipality in which the master franchisee is based. Our

interpretation is that such tax should not be applicable to international royalties. Tax on financial transaction (IOF/Exchange) This tax corresponds to 0.38 per cent of the amount in Brazilian currency exchanged into a

foreign currency. This tax is payable by the franchisee, who purchases foreign currency. Deductibility control rules This is an issue that affects the local franchisees. Assuming that the franchisee

determines its taxable income based on the actual profit method (lucro real) as opposed

to estimated profits (lucro presumido), the expenses incurred with payments of

franchise royalties are deductible. However, such deductibility is subject to certain

limitation. According to Brazilian legislation the limitation of fiscal deduction for

franchise royalties should be the combination of the limits for the trademark licence (1

per cent) plus the limit of know-how deduction, which may vary from 1 per cent up to 5

per cent depending on the predominant activity of the franchisor. In any event the

ceiling of fiscal deduction cannot exceed 5 per cent over net revenues. 175

Brazil

III INTELLECTUAL PROPERTY i Brand search As a general rule, Brazil is a first-to-file country with regard to trademarks. Also,

under Brazilian law, proprietorship over a trademark arises with registration, which

is of utmost importance for enforcing trademark rights in the country. Hence, before entering the Brazilian market, it is advisable to run a

trademark search within the database of the INPI to check for potential conflicts. A trademark search is particularly important in Brazil in case the title holder

intends to use the mark before a final decision by the Office. Indeed, the INPI has

been facing a serious backlog problem for years, to the extent that a trademark

application usually takes over two or three years to be decided. Given this time

frame, searches become an important tool to assess potential risks in the country

and guide possible investments. Also, as an exception on the first-to-file rule, Brazilian law recognises

priority rights for senior local users, which can prove bona fide use for at least six

months before the filing of the conflicting third party’s trademark. Unfortunately,

given the size and economic particularities of the country, it is very difficult to

conduct a fully reliable use search in Brazil. In addition, while Brazil has adopted the International Nice Classification

System, there is still a significant number of registrations featuring Brazil’s former

classification system of 41 classes. Also, while the INPI currently adopts the latest

45-class edition of the Nice Agreement, applications filed under the previous

editions have not been updated and coexist. The coexistence of these different classification systems and editions of the

International Classification System may be particularly problematic with respect to

restaurant and hotel services, an area of significant importance to the franchise business. ii Brand protection Brazil is not yet a member of the Madrid System, so trademark applications must be

filed with the INPI. Nevertheless, Brazil is a member of the Paris Union Convention, so

it is possible to file local applications with priority claims based on foreign applications,

as long as the convention requirements are met. Under Brazilian law, trademarks must

be subject to visual representation, so that some non-conventional trademarks are not

eligible for registration in the country, including sounds and fragrances. The INPI has been increasingly adopting online tools and systems and it is

now possible to file online trademark applications in Brazil. There are, however, some restrictions as to online applications. The most

significant one refers to the need to indicate goods and services from a specific pre-

established list, which somewhat matches the list adopted by Nice Agreement on

the International Classification of Goods and Services. Where the title holder prefers a more tailor-made description, a paper

application must be filed and slightly higher fees will apply. It is important to bear in mind that foreign applicants must have a local

representative. Therefore, although title holders are theoretically allowed to file their

176

Brazil

trademark applications directly, applications filed by foreign companies without

local representation will be summarily dismissed. Local representatives must also

have the powers to be served with summons from local courts for any disputes

arising from the relevant IP right. Also, Brazilian law stipulates that applicants are only allowed to seek

registration for trademarks in the fields of activity in which they are lawfully engaged. In light of the INPI’s significant backlog, in the absence of an opposition, local

applications are usually decided in no less than two or three years. Also, irrespectively of

oppositions, local examiners undergo an analysis on both absolute and relative grounds. In Brazil, a trademark registration is valid for 10 years and may be

indefinitely renewed for subsequent 10-year terms. While use is not required for

securing a registration, a trademark registration becomes vulnerable to a non-use

forfeiture action after five years from its grant. iii Enforcement Please find below the main protections afforded to franchisors’ other intellectual

property rights. Brazil is a member of the Berne Convention on Copyrights and the Universal

Copyright Convention, which requires signatory countries to give national treatment to

copyrightable works created in other signatory countries (including the United States).

Under Law No. 9,610/98 (the Copyright Law), copyright protection exists by law as of

the time the work is introduced into the market. Copyright registration is not mandatory. Law No. 9,609 (the Software Law) also came into effect in February 1998 and

governs software and computer programs. Software is also protected by copyright and,

although not mandatory for property purposes, registration at the INPI is allowed and

advisable. The Software Law provides heavy penalties for infringers (including

imprisonment and fines), as infringement has been rampant in Brazil. Goodwill is defined in Article 1142 of Law No. 10,406 of 10 January 2002 (the

Brazilian Civil Code), comprising all the necessary tangible (i.e., real estate property and

chattels) and intangible (all sorts of intellectual properties) assets, duly organised in order to

fulfil the company activities. Briefly, Brazilian doctrine considers that the franchisor’s

trademark is the most valuable intangible asset to attract clientele, along with the know-how,

the trade-dress and other particular elements of the franchise system that pertain to the

franchisor and will ensure the consistent level of quality of its goods and services. The Brazilian Industrial Property Law also broadly protects the intellectual

property assets of a franchise. In its Article 195, it defines a crime of unfair competition

as being committed by one who discloses, exploits or uses, without authorisation,

confidential knowledge, information or data, usable in industry, commerce or the

providing of services, to which one has had access by means of a contractual or

employment relationship, even after the termination of the contract or obtained directly

or indirectly by illicit means or to which he or she has had access by fraud. iv Data protection, cybercrime, social media and e-commerce The Brazilian Consumer Protection Code (CDC) establishes that consumers shall have

access to information on existing records, bookmarks, registers and personal and

177

Brazil

consumer data filed on them, as well as their respective sources. Consumer data and

records must be objective, clear, true and easily understandable, and may not contain

any negative information concerning any period prior to the previous five years. The CDC provides consumers with the right of access (1) to information held

in databases; (2) to sources of origin of such records; and also (3) to identify the

recipients of the content of information maintained in databases. On 30 November 2012 the country’s first law on cybercrime was issued. Law

No. 12,737/2012 sets forth that invading a third-party computing device, connected or

not to the internet, in improper violation of a safe mechanism and with intention to

obtain, tamper or destroy data or information without the express or implied owner’s

authorisation or install a vulnerability to gain unfair advantage is a criminal offence,

punishable with three months’ to one year’s imprisonment plus a fine. Recently, Decree No. 7,962/2013 was enforced, which regulates the

consumers’ rights foreseen in the CDC on e-commerce trade. In short, the Decree

has formalised and confirmed the applicability of consolidated principles and case

law that have already been applicable to the commercial relationship between

consumers and providers of services and goods on online transactions. Furthermore, the Decree stipulates that the supplier shall inform in a clear

and conspicuous manner that consumers can exercise the right to repent their online

purchase by using the same tool available when hiring the services and the

conditions of delivery, deadlines, quantity and quality set forth during the offer

shall be obeyed, among other obligations and rights.

IV FRANCHISE LAW i Legislation The Brazilian Franchise Law (Law No. 8955 of 15 December 1994) governs all

franchise relationships that are ‘established and operated in the Brazilian territory’. The Franchise Law is not intended to govern the private franchisor–

franchisee relationship, but rather to make this relationship more transparent by

requiring the franchisor to provide clear and detailed information to prospective

franchisees in a written disclosure document, known as a franchise disclosure

document (FDD). The FDD does not require recording or registration with any

agency and remains a private document between the parties. The FDD must be in clear and accessible terms and must be delivered to the

prospective franchisee at least 10 days prior to the execution of any binding

document related to the franchise and receipt of any payment. Even when international franchise agreements are governed by foreign law

and elect foreign jurisdiction, the delivery of the FDD to a prospective franchisee is

mandatory since the franchise will be operated in Brazil. ii Pre-contractual disclosure As mentioned above, the Brazilian Franchise Law requires the delivery of the FDD to

prospective franchisees containing several aspects of the business at least 10 days prior

178

Brazil

to the execution of any binding document related to the franchise and/or receipt of

any payment. Failure by the franchisor to supply such FDD within the terms established by

the Franchise Law entitles the franchisee to argue the nullity of the agreement and

the return of all amounts paid to the franchisor or to third parties indicated by same,

as initial fee and royalties, plus the recovery of damages. Below is a list of the information the Franchise Law requires to be included

in the FDD in a clear and comprehensive language: a a summary of the background, business form and complete name or

commercial name of the franchisor company and of all companies related

thereto, as well as their respective trade names and addresses; b balance sheets and financial statements of the franchisor company for the

two preceding years, it being understood that an audit is not required;

c a clear description of all the pending lawsuits involving the franchisor and its

related companies, sub-franchisors, and the owners of intellectual property

rights used in the franchising system relating to or arising from the franchise

agreement, which, depending on the outcome, may affect the continuance of

the franchised business; d a detailed description of the franchise, general description of the business and

the activities that will be performed by the franchisee;

e a profile of the ideal prospective franchisee as regards prior experience,

educational requirements etc.;

f requirement of the direct involvement of franchisee in the franchise operation; g specifications regarding:

• estimated initial investment necessary for the establishment and startup of

franchise operations; • value of the initial affiliation fee or franchise fee and any guarantees (if

any amount is specified by the franchisor); and • estimated cost of the facilities, equipment and initial inventory and

respective payment conditions; h clear information regarding periodic fees and other amounts to be paid by the

franchisee to the franchisor or to third parties, (including any relevant

calculations or formulae) and a description of rights, products or services for

which compensation is being made, specifically indicating the following: • periodic compensation for the use of the system, of the trademark or for

services provided by the franchisor to the franchisee (‘royalties’); • payments for lease of the equipment or premises; • advertising fee or similar payments; • minimum insurance coverage amounts; and • other amounts due to the franchisor or third parties related thereto;

i a complete list of all franchisees, sub-franchisees or sub-franchisor of the

franchisor as well as of those who have terminated franchise agreements in

the preceding 12 months; j if the franchisee is guaranteed exclusivity or a right of first refusal in any

particular territory or activity and, if so, under what conditions;

179

Brazil

k clear and specific information regarding the obligation of the franchisee to

acquire goods, services or materials necessary for the establishment,

operation or management of its franchise from suppliers designated and

approved by franchisor, providing a list of such suppliers, if applicable; l a description of services and products offered to the franchisee by the

franchisor with respect to:

• supervision of the franchise chain; • orientation or guidance services provided by the franchisor to the

franchisee for operating the business, and other services rendered to the

franchisee, aside from training;

• training of the franchisee, specifying its duration, content and cost; • training of the employees of the franchisee; • franchise manuals; • assistance on the analysis and selection of the location where the

franchisee unit will be established; and • layout and architectural plans of the facility of the franchisee, if applicable;

m the status of the trademarks before the INPI; n the franchisee’s rights and obligations upon expiration of the contract, in

connection with the use of know-how and trade secrets related to the

franchise and operation of competing activities; and o a draft of the franchise agreement and of any preliminary agreement.

iii Registration Although the Brazilian Franchise Law prescribes that franchise agreements are valid

and enforceable irrespective of whether they are registered, the recordal of franchise

agreements at the INPI is indispensable. The purpose of the recordal is threefold: a to make the agreement effective against third parties; b to permit the remittance of payments to the foreign party; and c to qualify the licensee for tax deductions.

In addition to the recordation of the franchise agreement at the INPI, for the

purposes of remuneration remittances, the registration of the agreement at the

Brazilian Central Bank (BACEN) is also required. Although the FDD remains a private document between the parties, for the

purposes of recordal of franchise agreements at the INPI it is also required that the

parties present to the INPI evidence of the receipt of the FDD by the franchisee. In addition, the franchise agreement must bear the signature of the

representatives of both parties along with two witnesses. The signatures collected

abroad must be notarised and legalised by the local Brazilian consulate. iv Mandatory clauses As mentioned above, the Franchise Law is not a relationship law. The INPI tends to focus

the analysis of the recordal of franchise agreements on the assessment of the validity of the

trademarks in Brazil, the specification of their serial number at the INPI in the 180

Brazil

agreement and, in case of agreements involving parent–subsidiary companies, on

the approval of the applicable rate for tax deductibility and remittances. Therefore, the parties should stipulate in the agreement all the terms and

conditions if the franchise relationship, including, without limitation, territory,

term, payment terms, licensed trademarks, authorised products, conditions for

opening an outlet, marketing-related obligations, IP protection clauses, events of

termination, consequences of termination, law and jurisdiction, etc. The parties may freely set out the percentage of royalties insofar as it stays

within the price commonly practised in the involved field and in the national and

international market. Payments 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 related companies, such as parent and

subsidiary, are limited by the corresponding ceiling of fiscal deductibility specified

by Regulation No. 436/58, which varies between 1 per cent and 5 per cent of the net

sales price depending on the field of industry involved. v Guarantees and protection In Brazil, guarantees from both individuals and companies in connection with

franchise agreements are, as a general rule, valid and enforceable. Under Brazilian

law, a guarantee is used as a way to secure a debtor’s obligation. Such security

might be over real estate or moveable property (in rem) or on a person, a third-party

to the debt-credit relationship (in personam), who will assure the debtor’s debt. The in rem guarantees are established on the Brazilian Civil Code under

Articles 1361 to 1368 and Articles 1419 to 1510. They are namely fiduciary

property, pledge, mortgage and antichresis. As a common element, the in rem

guarantees have the fact that any clause authorising the creditor to keep the object

of the guarantee, if the debt is not paid at maturity, is null and void. The satisfaction

of the debt occurs via the proceeds of the sale of the asset given as surety. To that

effect, the sale has to follow a specific procedure set forth by applicable law. There

are certain required formalities and registrations to be complied with in order for

such guarantees to be valid and enforceable in Brazil. While particular assets of the debtor are given under in rem guarantees, in personam

guarantees all the assets of the guarantor might assure the obligation. ‘Aval ’ and ‘fiança’ are

the legally permitted in personam guarantees that are based in a credit-debt relation. Practice shows that most of the franchise agreements in Brazil use the

personal guarantee (usually fiança) to assure franchisor’s interests in case the

franchisee fails to fulfil the debt. As a general rule, this type of guarantee must be

executed by the guarantor, its spouse, if the guarantor is married, with community

property regimen and two witnesses.

V TAX i Franchisor tax liabilities According to Brazilian tax law, foreign franchisors that are not registered as Brazilian

taxpayers generally cannot be legally liable for taxes due by the franchisee in Brazil.

181

Brazil

However, if the foreign franchisor maintains a presence in Brazil, for

instance, a registered company in Brazil and a Brazilian taxpayer status, the

Brazilian Revenue Services may try to make the franchisor jointly liable for taxes

not duly withheld and paid by the franchisee. Notwithstanding, Brazilian law

establishes that the franchisee is an independent entrepreneur who should bear the

risks of its commercial activities in their entirety. Consequently, if there is no evidence that encouraged a misconduct or

violation of applicable laws, the franchisor should not be involved in tax liabilities

of the franchisee, even if the franchisor maintains a presence in the Brazilian

territory. Thus, the Brazilian franchisee should be the one responsible for

complying with Brazilian tax laws and regulations. If no taxes are withheld in Brazil, the franchisor will not be authorised to

offset any credit against its federal taxes due overseas, in accordance with the

reciprocity treaty or treaty to avoid the double taxation executed between countries. ii Franchisee tax liabilities Generally, late payment of IRRF, CIDE, PIS-Import, COFINS-Import and IOF/ Exchange

are subject to the following interest and penalties: (1) official interest (SELIC), charged at a

monthly rate published by the government until payment; and (2) a daily fine of 0.33 per

cent on the tax due, up to a maximum penalty of 20 per cent. Please note that tax

assessments arising from failure in the tax collection are subject to a penalty of 75 per cent

of the tax not paid, while the penalty for fraud is 150 per cent of the tax due. Crimes against the Brazilian financial system are contained in Articles 2 to 23 of

Law No. 7,492 of 1986. Accordingly, the remittance of expenses abroad by any means

other than through a financing institution duly authorised by the Brazilian Central Bank

and without the payment of taxes due shall be classified as white-collar crime. On the other hand, crimes against the Brazilian tax system are contained in

Articles 1 and 2 of Law No. 8,137 of 1990. Accordingly, the company’s legal

representative or administrator would be held criminally liable for tax evasion and

crimes against the economic order if they deceive tax authorities, neglect to provide

information or provide false information to tax authorities, provide incorrect or untrue

data, or neglect operations of any kind in a document or book required under tax laws. Regarding ISS, in case of non-withholding, the importer will be subject to a

fine of 60 per cent of the value of the tax accrued. It should be noted that the above-

mentioned penalty is specific to Rio de Janeiro and may vary from city to city. iii Tax-efficient structures The most tax-efficient structure for international franchising will depend on the

particulars of the case, including corporate structure and tax regimen adopted by the

parties, location of each party and the specific goals of the parties involved.

Therefore, this aspect varies on a case-by-case basis and should be examined from

Brazilian and foreign jurisdictions’ point of view, as different laws may affect the

conclusion. It should also be mentioned that the best tax structure may not always

represent the most efficient logistical or contractual structure. 182

Brazil

VI IMPACT OF GENERAL LAW i Good faith and guarantees The Brazilian Civil Code, which became effective on 11 January 2003, although it

does not expressly mention franchising, which is subject to a specific law (Law No.

9,855/94), as mentioned above, it prescribes general rules and principles, such as

good faith, which also have to be observed in franchising legal documents. The principle of good faith, which was already used in doctrine and case law

to implicitly rule the relationship between the contractual parties, is now expressly

mentioned in Articles 113 and 422 of the Civil Code. Such principle provides that

the contracts should be negotiated and executed according to what was foreseen or

that both parties should obtain the expected returns or results. Thus, beyond the

obligation not to harm, the principle of good faith as set forth in the Civil Code

grants the party’s obligation to cooperate with fairness and honesty during all

phases of the transaction, including after its termination. The applicability of the good faith in the offering stage of a franchise

relationship is due to the perceiving economic power of the franchisor – who holds the

brand, know-how, tested the technology – vis-à-vis the potential franchisee, who needs

to have the franchisor’s information in order to develop its own business. This is why in

franchise transactions the transparency of the information provided by the franchisor,

especially in the offering stage, is more relevant than transparency in other contractual

relationships where the parties have the same economic condition. On the other hand, this principle also benefits the franchisor to the extent that

minor or irrelevant omissions or errors in the FDD that do not affect the transparency

obligation by not resulting in a substantial modification of the expected or negotiated

conditions cannot be used to justify a claim for misconduct by the franchisor. The standards of the principle of good faith shall subsist through all phases

of the transaction and even survive termination, which means that the contracting

parties must observe and act in accordance with such standards before and during

the term of the agreement, as well as after its termination. ii Agency distributor model Agency agreements are ruled by Law No. 4,886, of 9 December 1965 (amended by Law

No. 8,420 of 8 May 1992) and also by some specific provisions of the Brazilian Civil

Code (Articles 710 to 721). Such regulation is very protective of the agent, imposing

several limitations on the right of the principal to terminate the agreement, as well as

pre-established penalties to be incurred by the principal in the event of termination. Therefore, as a general rule, distribution or agency agreements are not

confused with franchise agreements. iii Employment law The Brazilian Franchise Law expressly mentions, in the definition of the franchise

relationship, that it does not characterise the employment relationship between the

franchisor and franchisee. 183

Brazil

Likewise, under a typical franchise agreement (which presumes no hierarchical

subordination of the franchisee’s employees in relation to franchisor), there is also no

labour relationship between the franchisee’s employees and the franchisor. iv Consumer protection The CDC sets forth the joint and strict liability of all the parties involved directly or

indirectly in the supply chain of products and services to consumers. Such liability does

not depend on the existence of fault and the CDC allows the end consumer to file a

claim against any of such economical agents that has participated in the circulation of a

product or service that has caused harm or has any defect in quality or quantity. Therefore, although there is no consumer relationship between the franchisee

and the franchisor, under the definition of the CDC and also due to the fact that it is

the title holder of the relevant trademarks, the franchisor may be deemed to be one

of the agents of the supply chain and, thus, be held liable towards end consumers

for acts of the franchisee. This understanding is recurrent in claims derived from

harm and losses arising from a defect in quality or quantity of products supplied by

franchisor or its designated suppliers to the franchise chain. In any event, even if the franchisor is deemed to be liable and condemned to

indemnify end consumers, Article 88 of the CDC grants it the right of recourse against

the franchisee, provided that the claim in question was due to the franchisee’s fault. v Competition law Law 12,529/2012 (the Competition Law), which is effective from 29 May 2012, regulates

competition in Brazil and establishes rules concerning the abuse of a dominant position. The

Competition Law lists those anti-competitive 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:

a limiting or restraining market access by new companies; b creating obstacles for the establishment, operation or development of a competitor

company or supplier, purchaser, or financier of a specified product or service; c 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; d refusal to sell products or services normally available for sale; and e 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 government body

competent for examining and assessing the occurrence of actions that may impair or

limit free competition or result in the control of significant market shares. Anti-competitive 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

184

Brazil

commercial sector and the nature of the transaction. Franchise agreements have

been considered pro-competitive and the restrictions usually imposed are intended

to protect the network. Since international franchise agreements must be submitted for recordation

with the INPI, the governmental agency’s approval can be considered a prima facie

confirmation that the franchise agreement complies with the antitrust regulations

because otherwise the INPI should have forwarded the agreement to CADE for

analysis prior to its regulation. In franchise relationships, covenants restricting competition are typically

permitted when they are established in a reasonable manner so as to ensure

uniformity within the franchise network by imposing a single marketing strategy for

the whole franchise chain. As mentioned above, the Competition Law lists the anti-competitive 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, establish

supply arrangements, or make compulsory the acquisition of certain products due to

specific standards of quality may be considered admissible with the context of rule of

reason. They may be abusive and their validity may be questioned if such restrictions

are unduly enforced by the franchisor without reasonableness. For instance, extending

the franchisee non-competition obligation to non-competing goods could be construed

as anti-competitive practice, depending on the circumstances. Further, the Brazilian Industrial Property Law, which regulates rights and

obligations relating to industrial property, sets forth that the party who discloses,

exploits or uses, without authorisation, confidential knowledge, information or data,

usable in industry, commerce or the providing of services, except those that are of

public knowledge or that are obvious to a person skilled in the art, to which he or

she has had access by means of a contractual or employment relationship, even after

the termination of the contract, shall constitute crime of unfair competition practice. With regard to exclusive territory, the Brazilian Franchise Law determines

that the FDD must include clear information about the territorial rights granted to

the franchisee, particularly: (1) if the franchisee is guaranteed exclusivity or a right

of first refusal in any particular territory or activity and, if so, under what

conditions; and (2) if the franchisee has the right to sell or render services outside

its territory or provide such services outside Brazil. Therefore, there are no

restrictions on granting territories whether exclusive or non-exclusive in Brazil. vi Restrictive covenants Non-compete covenants are very common in franchise agreements, in which the

maintenance of the most strict loyalty and good faith between the parties is

inherent, especially as it involves the disclosure of confidential privileged

information and know-how regarding business techniques and methods. Although the 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 185

Brazil

with the franchisor during or after the term of the franchise agreement should be

legally valid and enforceable due to the special features of a franchised business. The validity of such contractual clauses should be questioned when their effects lead

to dominance in a relevant market for products or services, arbitrarily increase profits or lead

to abusive control of a dominant position in the market. In addition, covenants limiting

competition must always provide for a period of time and a specific territory in which the

non-competition obligation applies. Yet this has not been the consideration under franchise

agreements and the courts have been upholding such provisions. In-term covenants not to compete are considered natural in franchise agreements

and may be agreed by the parties for the entire duration of the agreement and renewals.

Their enforcement is usually fairly simple, provided that the evidence of violation

clearly shows the franchisee’s participation in the infringement. vii Termination Enforceability of post-term restrictive covenants We refer to our comments made above, regarding in-term non-compete provisions to

mention that post-term non-compete clauses should also be enforceable under certain

circumstances. Brazilian courts have been enforcing post-term covenants not to

compete when they specify a period of time, generally from two to five years, and a

specific territory, which may be the same city or even state where the franchised unit is

located. Franchisors may also limit their franchisees’ ownership interests in competitive

companies, provided that they can justify such restrictions on the maintenance of

quality of the franchised network and the products or services offered by franchisees

and the protection of trademark goodwill, and, most importantly, trade secrets. Brazilian law provides for specific performance of post-term non-

competition provisions in circumstances where the franchisor can demonstrate that

the breach of such covenant is a result of a franchisee’s behaviour. Injunctions are

easier to obtain with respect to breaches of in-term covenants not to compete,

although post-term restrictions are also enforceable. Besides injunctions enjoining

the conduct of the competitive business, a franchisor’s remedy for breach of these

provisions is also to assert a claim in court (or through arbitration) for the damages. Further, as mentioned above, under the Brazilian Industrial Property Law,

where the franchisee discloses trade secrets, such leakage or misuse is actionable, as

a crime and civil tort. Therefore, the violation of a valid and enforceable non-

compete covenant may be considered not only a material breach under the franchise

agreement and a violation of the principle of good faith, but also as a crime of

unfair competition, depending on the details of case and a civil infringement. Ability of the franchisor to take over the franchisee’s business It is possible under the Brazilian legal system for the franchisor to take over the

franchisee’s business. However, the franchisor’s ability to do so will depend on the

provisions on the underlying franchise agreement. The contractual parties must set forth

the terms and conditions under which such takeover can occur. The terms of the

relevant lease agreements should also be taken into consideration, so as to ensure that

the agreement between the franchisor and the franchisee will be effective thereunder. 186

Brazil

Restrictions on shareholdings in local businesses Franchising is understood as an intuitu personae relationship and, therefore, it is

very common and broadly accepted that the franchisor imposes, under the relevant

franchise agreement, certain limitations to the franchisee’s shareholdings in local

businesses, especially in connection with change of control or transfer of equity

interest which entails a change in the administration and guidance of the franchisee

company. Such restrictions should be reflected, as much as possible, in the

franchisee’s articles of association or by-laws. Restrictions on taking local leases There is no specific restriction on the franchisor taking over the local lease of the former

franchisee. However, this aspect must be clearly defined in the franchise agreement and the

relevant lease agreement so that the landlord agrees from the beginning of the lease to the

assignment of the premises to the franchisor in the event of termination of the franchise

agreement. We usually recommend that such provision ensures the right of the franchisor

directly taking over the lease or appointing a new franchisee or licensee to do so. This

provision assists the franchisor in ensuring the continuity of the business at the same

location and avoids the conversion of the business into another brand or operation. viii Anti-corruption and anti-terrorism regulation Although there are no special anti-corruption and anti-terrorism regulations related

to franchising, fraud, corruption and money laundering are crimes under the

Brazilian Criminal Code. Further, Law No. 12,846/2013 was recently enacted and will be enforceable

as of 1 February 2014. Said Law provides that legal entities may be considered civil

and administrative liable for committing acts against the national or foreign public

administration, including acts related to bribery, fraud and laundering. ix Dispute resolution Forum Mediation is a recognised form of alternative dispute resolution, but is not

mandatory. Recently, the Minister of the Superior Court of Justice delivered two

law projects to the Senate: one to create a legal framework for mediation and the

other to modify Law No. 9,307/96 (the Arbitration Law). Brazil is a signatory and has ratified by Decree No. 4,311, dated 23 July

2002, the New York Convention of 10 June 1958 on the Recognition and

Enforcement of Foreign Arbitral Awards. As a result, a court in Brazil will likely

honour a decision to use the international arbitration dispute resolution procedure,

and therefore refuse to hear any disputes arising under a franchise agreement. The Brazilian legal system accepts the adoption of foreign law and jurisdiction

or arbitration. However, foreign decisions, including foreign arbitration decisions, must

go through a process of analysis at the Superior Court of Justice in order to be locally

enforceable. Only after the approval of the decision by the Superior Court is the

necessary exequatur given to demand in local courts compliance with the foreign court

or arbitration decision. This homologation procedure currently takes from two to

187

Brazil

24 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 takes from four months to two years,

depending on the complexity of the case. Among others, the main requirements to be complied with by the foreign

decision are as follows: a the parties must prove that the decision attends to all legal formalities; 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 order to receive the exequatur from the Superior Court of Justice, the foreign

decision cannot be contrary to Brazilian public policy and local practices.

For that reason, it is common to carve out in the contract some issues, especially

involving intellectual property, unfair competition and non-compete covenants,

which the franchisor may elect to apply for preliminary injunctions directly in

Brazil through the courts. Further, it is recommended that the choice of law corresponds to the jurisdiction. The

risks of confusion by having the judge of one country applying another country’s law are too

high. Additionally, the advantages of selecting Brazilian law and jurisdiction would be to

avoid delays in serving process on the franchisee (avoids the requirement of letter rogatory

and the need to go through the enforcement procedure of foreign decisions at the Superior

Court of Justice). Also, since there are no relationship laws regarding franchising, the

agreement is the main source of information as to the terms and conditions of the grant of

the franchise and, thus, Brazilian law provides a fairly liberal environment for franchise

agreements. Brazilian judges are used to dealing with preliminary injunctions on an

expedited basis and ex parte injunctions are not usual. Therefore, the adoption of local law

should be considered as a more efficient option. Procedure There is no specific procedure for franchising disputes; they are governed by the

general rules of the Brazilian Civil Procedure Code and other applicable legislation

regarding court proceedings and arbitration. ABF will have soon a dispute resolution centre, offering services on

mediation and arbitration.2

Remedies Preliminary injunctions may be obtained ex parte if the harmfulness of waiting for a final

judgment is demonstrated and the party presents sufficient evidence that its claim is properly

substantiated. However, as companies are considered, by Brazilian law, to play a 2 Further information: www.portaldofranchising.com.br/servicos/mediacao-e-arbitragem.

188

Brazil

highly relevant social role (as they generate revenue, pay taxes and provide jobs), it

is not very usual to obtain injunctions to enforce non-compete provisions. Further, criminal search and seizure orders to gather all confidential material,

products bearing the trademarks and marketing materials, as well as to remove all

franchise-related elements, such as colour schemes and signs that characterised the site

as franchised unit may be granted on an ex parte basis, if the harmfulness of waiting for

a final judgment is demonstrated and the party presents enough evidence that its claim

is properly substantiated. Although we cannot precisely confirm the duration of such

procedure, we estimate that an injunction can be obtained within one week. It should also be noted that Brazilian law does not allow indemnification for indirect

damages, as provided by Article 403 of the Brazilian Civil Code: ‘Even if the

indemnification results from the wilful misconduct of the debtor, the damages only include

the effective losses and the loss of profits directly and immediately caused by it.’ Noteworthy franchising disputes An interlocutory appeal filed under No. 0011368-84.2012.8.19.0000 at the 11th

Court of Rio de Janeiro, against a plea for charge of venue filed at a lower court

instance, was rejected on 2 May 2012. Under the plea one party claimed that the

lawsuit had not been filed at a court of competent jurisdicion, according to the

choice of juridisdiction clause of the franchise agreement. According to the appellant, the choice of jurisdiction clause should not be

deemed valid since the franchise agreement should be considered an adehesion

contract, which does not allow for choice of jurisdiction. However, the decision dismissing the interlocutory appeal stated that the clause

of choice of jurisdiction in a franchise agreement shall not be considered abusive if the

franchisee is not able to prove that the franchisor is in a favourable position in relation

to economical and technical aspects involving the franchisor–franchisee relationship. Another important precedent decision was rendered on 3 June 2013 through

appeal No. 0375549-57.2008.8.19.0001 filed at the 9th Court of Rio de Janeiro

against the first instance decision, which was unfavourable to the franchisee. In short, the grounds of the appeal was that the franchisee’s business failure

was attributed to the lack of clear information about the franchise system in the

FDD, which did not observe all the strict limits of the Brazilian Franchise Law. The

appeal was rejected only due to lack of evidence of the damages effectively caused

to the franchisee as a result of the lack of information in the FDD. The precedent decision expressly recognised the importance of the examination of

the evidence, which must certify the economic and financial unbalance of the franchise

agreement and its correspondence with the lack of clear information in the FDD. An interlocutory appeal No. 0004862-92.2012.8.19.0000 was filed at the

12th Court of Rio de Janeiro against the rejection of an injunctive relief required at

the first instance to determine the cease of undue use of a franchised trademark by

the illegitimate assignee of a franchise agreement. The interlocutory appeal was accepted on 24 July 2012 determining the granting

of the injuctive relief to determine the cease of use of the trademark by the illegitimate

assignee of the franchise agreement, under the penalty of a daily fine. The decision was

rendered on the grounds of existence of a clause in the franchise agreement prohibiting

189

Brazil

the assignment, by the franchisee, of the franchise agreement to a third party

without the franchisor’s prior consent. The higher instance court recognised that the assignment of the franchise

agreement was undue and that such act was able to cause significant damages to

consumers and to the reputation of the trademark, which was considered well-

known in its business segment. Appeal No. 0120429-47.2007.8.19.0001 was filed at the 10th Court of Rio

de Janeiro against the lower level instance, which had denied the payment of

damages asked by the plaintiff. In short, the customer, a young child, was hit by a piece of a toy, inside a franchise

unit of a well-known franchise chain and its legal representative filed a lawsuit against the

franchisor asking for damages to compensate the moral damages suffered by the child. The franchisor presented a defence alleging that it was not the legitimate

defendant, since the fact occurred inside the franchise unit of a certain franchisee. However, the franchisor was deemed to be a legitimate defendant by the

higher court, which accepted the appeal and determined the payment of

compensation due to moral damages caused to the plaintiff in the amount of 2,000

reais, plus interest and inflation rates updated, since the trial date.

VII CURRENT DEVELOPMENTS The Bill Project No. 3234/2012, which intends to revoke the current Brazilian

Franchise Law, is running its legislative path, provided that it was recently

approved by the Committee on Finance and Taxation without any amendments. It is not believed the Bill Project will be approved before July 2014, since it

still has a long way until final presidential sanction. The Bill Project aims to regulate the legal institute of the franchise and not

just the franchise agreements. It also replaces terms such as ‘trademarks and

patents’ with ‘intellectual property’, a broader concept. Furthermore, it establishes, in the case of sublease of a commercial real estate,

that the amount to be paid by the franchisee to the franchisor might be higher than the

rent the franchisor pays to the landlord, if it is expressly foreseen in the FDD. There is an outgoing discussion about how experienced a business should be

before it is allowed to offer franchises. The Bill Project requires at least two years

before starting a franchise business, which is explained by its author as an assurance

that the franchise company is ‘actually engaged in the industry for a reasonable

time and thus holds the operational technology tested’. Another relevant matter is the possibility of public companies, directly or

indirectly controlled by the union, states, federal district and municipalities, to

adopt the franchise system. The public company would have to disclose the FDD in

a daily newspaper in the state where the franchise would be offered. The FDD

should also indicate the objective criteria for selection of the franchisee. The Bill

Project intends to amend Article 24 of the Brazilian Bidding Law (Law 8,666/93)

exempting the franchise of the due public bidding process.

190