Hao Wang
RayYin & Partners
The seventh International Franchising Session, hosted by the China Chain Store & Franchise Association, witnessed the appearance of foreign brands such as IDO, The Pizza Company and Cartridge World. After the meeting, US company Burger King concluded its franchise agreement with Xiamen ITG Group Corp., Ltd., under which the latter was licensed the exclusive rights in Fujian Province to operate Burger King.
A popular and efficient management mode, commercial franchising (hereinafter “franchising”) means the business activity wherein an enterprise (the “franchisor”) licenses its own business resources, such as registered trademarks, patents, etc., to other business operators (“franchisees”) and charges a franchise fee. The franchise fee entitles the franchisees to intellectual property rights, and successful mode and experience of management.
To regulate franchising and promote its steady and orderly development, the State Council of the PRC promulgated the Regulations for the Administration of Commercial Franchising (the “Regulations”), under the guidance of which the Ministry of Commerce issued the Measures for the Administration of Record Filings in Connection with Commercial Franchising (MARF) and the Measures for the Administration of Information Disclosure in Connection with Commercial Franchising (MAID). Both domestic and foreign franchisors must abide by the above Regulations and Measures. This article deals with the issues that are critical to franchisors.
Qualification of Franchisors
The Regulations set out the requirements for franchisors in China as follows:
(1) “Franchisors” shall only refer to enterprises with business resources such as registered trademarks, logos, patents and proprietary technology.
(2) A franchisor shall have a well-established business model and the capacity to provide to its franchisees such services as business guidance, technical support and business training, etc., on a continuous basis.
(3) A franchisor that intends to engage in franchising activities shall have at least two stores that it operates directly and shall have been in business for more than one year.
Intellectual Property Rights
Under a franchising arrangement, proper licensing of intellectual property rights is always one of the key issues. As for trademark licences, as a general rule franchisors usually licence a trademark which has already been registered in China and file its license agreement with the China Trademark Office (CTO) accordingly. However, since it usually takes around three years for the CTO to issue an approval or rejection notice on the application, the franchisor should anticipate that when it needs to operate a franchise model in China it may still be waiting for a response from the CTO. In this case, even if the franchisee agrees to be bound under such a licence agreement, franchisors need to evaluate the risks involved.
Record Filing Procedure and Information Disclosure Requirements
In accordance with the Regulations, a franchisor shall, within 15 days of the date of entering into its first franchise contract, apply for record filing with the department in charge of commerce. Also, the MART stipulates a disclosure requirement whereby at least 30 days prior to the conclusion of a franchise contract the franchisor shall disclose all related information in written form to the franchisee and provide the franchise contract. If a franchisor conceals information that it ought to have disclosed or discloses false information, the franchisee may terminate the franchise contract. Accordingly, the franchisee shall have the right to report the violation to the department in charge of commerce. If the violation is ascertained to be true after an investigation, the department in charge of commerce shall order rectification and impose a penalty up to Rmb100,000 (US$14,000).
Compared with direct foreign investment and equity acquisition of the target in China, a franchise arrangement has fewer legal obstacles. Foreign players, especially in the service sector, may set out their strategy in China accordingly.
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