INTERNATIONAL FRANCHISE EXPO SERBIA 20114-5 November 2011, BelExpoCenter, Belgrade

INTERNATIONAL LEGAL FRAMEWORK OF FRANCHISING – EUROPEAN CODE OF ETHICS

SPEAKER: SOTIRIS YANAKAKISSOTIRIS YANAKAKISFranchise Attorney-at-Law LL.M. Harvard

General Director and Legal Counsel of the FRANCHISE ASSOCIATION OF GREECEMember of the Legal Committee of the EUROPEAN FRANCHISE FEDERATION

Vice Secretariat for the Legal matters of the MEDITERRANEAN FRANCHISE FEDERATION

Vice Secretariat for the Legal matters of the WORLD FRANCHISE COUNCIL

• A franchise is a contract between two businesses.

• Franchisor grants the franchisee the right to operate its business system in return for payment of fees and royalties.

• The business system typically includes intellectual property (such as trademarks, trade names and logos), the right to sell products or services, access to business knowledge and methods, and other physical and intangible assets.

• Franchisors may operate some of their units directly and franchise others.

 

THE FRANCHISE LEGAL RELATIONSHIP 1. Potential for Conflict •Potential for conflict exists despite the desire of both parties to

succeed.

•Unequal bargaining power: the franchisor may have more extensive business and franchising experience and generally has control over the terms of the franchise agreement.

•The franchisee may have little business experience

•The franchisee must often “take or leave” the franchise agreement as offered.

Reliance on the franchisor’s representations for potential of business success

Franchisors sometimes exaggerate the expected success or provide inaccurate/misleading financial information.

Franchisee usually unable to fund litigation in case where problems arise.

  

Possible issues include: 

•lack of pre-contract disclosure;

•deceptive practices, including misrepresentations regarding the franchise;

•unfair contract terms arising from a refusal by franchisors to negotiate the terms and conditions of contracts

•complexity of documentation;

•excessive prices charged for mandatory goods and equipment supplied by franchisors or other providers to franchisees, even when items are available more cheaply from alternative suppliers;

•hidden rebates and commissions received by franchisors from required suppliers;

•encroachment by the franchisor on the franchisee’s geographic trading area;

•franchisor-imposed system wide changes that bear significant cost;

•failure to provide adequate service and support to franchisees;

•substantial increases to renewal fees;

•use of advertising levies for non-advertising purposes;

•transfer and renewal restrictions and franchise renewals on different and more onerous terms; and

•unfair terminations.

FRANCHISING ETHICS

European Code of Ethics for Franchising, ‘Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee 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 indirect 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, supported by 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.’

  WFC Ethics , ‘Franchising is a commercial development strategy

based on an independent partnership between independent commercial entities, the franchisor and the franchisees’

PREVIOUS BLOCK EXEMPTIONEUROPEAN REGULATION No 4087/88

‘franchise means a package of industrial or intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of goods or the provision of services to end users’

Further to the above, it is clear that franchising has two basic aspects: the legal (‘package of industrial or intellectual property rights) and the business aspect (‘a system of marketing goods and/or services and/or technology and a commercial development strategy’). Due to those aspects and the increase of transactions and collaborations in an international level, franchise agreements have become the preferable model of contract for many businesses around the world.

Certainly, that quick development was expected as franchising enables a business to expand and exploit its concept/franchise system both in national and international level quickly and with low cost while if this expansion proceeds carefully and according to laws and general policy of commercial transactions, results to the success .

WHAT HAPPENS IN FRANCHISING WORLD

Only a few countries have a special legal frame concerning franchising, sometimes even then not all aspects concerning franchising are covered.

Those countries that do not have a special legal frame concerning franchising, apply general provisions of national laws in order to solve problems arisen from franchise agreements and franchise collaborations.

However, this is problematic since the repercussions of using general provisions of national laws sometimes produces unfair results which may not be suited to franchising.

these laws do not cover all aspects of franchising but treat only some of them so as very few countries have adapted complete franchise regulations that cover all aspects of franchising.

Disputes between the contracting parties in franchise are solved either by mediation (where this is provided) or arbitration or Courts.

FRANCHISE LAW ADAPTION MATTERS

Thus, it is of outmost importance that special franchise laws are in place in all countries:

◦ The achievement of security between the contracting parties.◦ The common appreciation of franchise rights and obligations

and the common settlement of disputes between the parties◦ The quicker development of franchising around the world as it

would be better founded and structured◦ The achievement of more benefits and profits for the parties

(franchisor and franchisees) and less risk as franchising would operate in a legally ‘well-framed way’

◦ The differentiation of franchising from any other kind of similar contracts existing around the world in different countries (that are regulated differently in each of them)

WORLD LEGISLATION ENFORCEMENT

The usual legal framework in countries with special laws for franchising consists of mainly either disclosure laws or relationship restrictions or registration laws or all of them.

Countries applying specific laws concerning franchising are the following:

COUNTRY DISCLOSURE

LAW

RELATIONSHIP

RESTRICTIONS

REGISTRATION

LAWS

ALBANIA YES YES NO

ALBERTA,

CANADA

YES YES NO

AUSTRALIA YES YES NO

BARBADOS NO NO YES

BELARUS NO YES NO

BELGIUM YES NO NO

BRAZIL YES NO YES

PEOPLE’S

REPUBLIC OF

CHINA

YES

YES

YES

COUNTRY DISCLOSURE

LAW

RELATIONSHIP

RESTRICTIONS

REGISTRATION

LAWS

CROATIA NO NO NO

ESTONIA NO YES NO

FRANCE YES NO NO

GEORGIA YES YES NO

GREECE

INDONESIA YES YES YES

ITALY YES YES NO

JAPAN YES YES NO

KAZAKHSTAN NO YES NO

KYRGYZSTAN NO YES NO

LITHUANIA NO YES YES

MAKAU YES YES NO

MALAYSIA YES YES YES

MEXICO YES YES YES

COUNTRY DISCLOSURE

LAW

RELATIONSHIP

RESTRICTIONS

REGISTRATION

LAWS

MOLDOVA YES YES YES

NEW ZEALAND NO NO NO

ONTARIO,

CANADA

YES YES NO

PRINCE

EDWARD

ISLAND,

CANADA

YES

YES

NO

ROMANIA YES YES NO

RUSSIAN

FEDERATION

NO YES YES

SAUDI ARABIA NO YES YES

REPUBLIC

OF KOREA

YES YES YES

SPAIN YES NO YES

SWEDEN YES NO NO

TAIWAN YES NO YES

TURKEY NO NO NO

UKRAINE NO YES YES

UNITED

STATES OF

AMERICA

YES YES YES (in 14 states)

VENEZUELA NO YES NO

VIETNAM YES YES YES

DISCLOSURE LAW

financial information of the Franchisor and/or the master Franchisee (where applicable) publishable by law of last 2-3 years

business history of the Franchisor and/or the master Franchisee (where applicable)

a description of the franchised business. An estimate of the total costs associated with establishing a

franchised business. a general description of the principal characteristics of the

know -how the provision of technical support by the Franchisor and/or

the master Franchisee (where applicable) to the Franchisee.

names and addresses of the franchise network (with special reference to the existing franchised businesses in the case of a master Franchisee).

the number of Franchisees whose franchise agreement have been terminated over the previous two (2) years and the reasons for such termination.

information relating to all licenses required by law for the establishment and operation of a franchised business whenever necessary and to all prerequisites for the issue thereof.

the essential elements of the franchise agreement such as rights and obligations of both parties, the duration of the agreement, conditions of renewal or termination, exclusivity clauses etc.

information on the master franchise agreement with the exception of the financial arrangements between Franchisor and master Franchisee.It is recognised that in discussing individual business projections with Franchisees, Franchisors are invariably involved in making assumptions which can only be tested by the passage of time.

SPECIAL FORMALITIES

Special definition of franchising Obligation for a written agreement for franchising duly

signed by the parties with the provision that all existing no written agreements should be adapted to a written form within a specific time period of 6 months-1 year otherwise they should be annulled .

Provision for a minimum duration of a franchise agreement of 5 years

REGISTRATION LAWS

Obligation of registration of the franchise contract before the competent public authorities in each country or the Franchise Associations and provision of penalties in case of violation

Obligation of registration of interruption of a franchisor’s running of business and concept before the competent public authorities in each country or the Franchise Associations and provision of penalties in case of violation

Registration of franchisor’ s first franchise point and obligation of a previous proved operation of at least 1 year before developing each franchise system

RELATIONSHIP LAWS

Provisions about the post contractual relations of the parties

Main obligations and rights of each party in a franchise agreement