INTRODUCTION TO FRANCHISING LAW IN INDIA:
Franchising is the process by which an entity (franchisor) that has developed a particular way of doing business expands the business by giving other existing or would be entrepreneurs (franchisees) the right to use the franchisor’s proven business model in another location for a definite period of time in exchange of initial and ongoing fees.
Franchising is a special type of licensing arrangement where the right to use the business model is supported by a license to use the intellectual property rights associated with that business.
Legal Definition: There is no specific legislation in India dealing with franchising. However, Chapter 5 of the Finance Act 1999 defines a ‘Franchise’ as ‘an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol, as the case may be, is involved.’
Parties Involved: In a typical franchise agreement, there are minimum two parties involved:
The FRANCHISOR who lends his trade name and the business system
The FRANCHISEE who pays an agreed royalty fees for doing the business under the mark or name of franchisor.
Various Phases of Franchise Process:
The various phases of Franchise Process can be summarized as follows:
TYPES OF FRANCHISING AGREEMENTS:
On the basis of format of franchising arrangements
A product manufactured by a franchisor is sold to a franchisee who, in turn, sells it to consumers under the trademark of the franchisor. Automotive and petroleum franchises such as Ford, GM and Exxon are examples of this type of franchise model.
The franchisor sells the franchisee an essential ingredient, or provides some specific know-how which, along with ongoing quality controls by the franchisor,
enables the franchisee to manufacture or process the final product and sell it to retailers, or in some cases, to end consumers. Coca-Cola operates in many markets throughout the world in this manner, supplying franchisees with the essential ingredient of Coca-Cola (which is protected as a trade secret).
The owner of a business (franchisor) licenses to another (franchisee) the right to use the particular business model including the intellectual property rights associated with it. Internationally known brands such as Hilton, Holiday Inn and 7-Eleven are examples of companies that use this model.
On the basis of control over the franchisee
A franchisor enters into individual franchise agreements for each outlet (single-unit franchisee) thereby franchisor having direct control over each franchisee.
However in case of international franchising due to issues of repatriating revenues, tax implications, as well as difficulties related to dealing with the unique attributes of different countries, including language, culture, laws, regulations and business practices a master franchise model (as explained below) is preferred.
A franchisor may enter into a master franchise agreement whereby another entity is given the right to sub-franchise the franchisor’s business concept within a given territory in accordance with a development timetable.
Here, the franchisee, in effect, acts as the franchisor in the target country. The disadvantage of this approach is the loss of control over sub-franchisees (with whom the franchisor has no contract).
Following are essentially some of the ways in which a franchise system may be expanded overseas:
The franchisor, either from its headquarters or from a foreign branch operation, grants individual franchises to franchisees in the target country.
The franchisor enters into a master franchise agreement.
The franchisor establishes a subsidiary in the target country, and that subsidiary acts as the franchisor.
A joint venture is established between the franchisor and a third party who is knowledgeable about the target country. The joint venture will act as the franchisor in the target country.
In the context of internationalizing a business, it is important to bear in mind that intellectual property rights are essentially territorial,
that is, the rights are limited to the territories in which they have been registered/granted or arisen. Therefore, if a business is planning to take a franchise operation overseas, it would be important to ensure that its intellectual property rights are protected in that territory.
LAWS THAT APPLY TO FRANCHISING:
India, at present, does not have a specific legislation for regulating franchise in India. In view thereof a franchise agreement in India is governed by multiple allied legislations (as shown below) which effect the relationship between the franchisor and the franchisee.
FRANCHISE DISCLOSURE LAWS / REGISTRATION REQUIREMENTS:
Disclosure laws and registration requirements are those that apply before a franchise relationship is entered into.
Disclosure Laws: Some countries have disclosure laws that require information to be provided to prospective franchisees before any contract is signed.
In many other countries, there is no legislative obligation on the franchisor to disclose specific information to the franchisee before signing a franchise agreement. In such countries, and even in countries that require disclosure,
it is incumbent on the prospective franchisee to properly consider the information provided and obtain expert advice,
Registration requirements: A number of countries require a variety of legal arrangements to be registered.
In such countries, franchisors may be required to register their disclosure documents and all exhibits (e.g. contracts, audited financial statements, list of franchise owners, and other relevant materials) with a government agency.
Independently of a requirement to register the franchise agreement, some countries require specific recordal of intellectual property licenses at a government agency/IPO.
India does not have a franchise specific legislation containing provisions specifically for such mandatory disclosure, and registration requirements.
However, the Indian Trademark Act provides for recordal of registered user of a mark. Though recordal of the same is voluntary, it is advisable that the registered user be registered with the Registrar of Trade marks by filing Form TM-28.
FRANCHISE RELATIONSHIP LAWS:
Franchise relationship laws deal with conduct after a franchise contract is signed. Some of these are discussed below:
Unjust terminations: In general, the law requires that there should be good cause for terminating a franchise. In case of certain serious defaults,
such as criminal conviction, abandonment and insolvency, no opportunity to correct is required to be given.
Anti-competitive clauses in a franchise agreement: The superior bargaining power of the franchisor may be abused by including anti-competitive clauses like resale price maintenance, territorial exclusively, exclusive dealing, tying arrangements which to limit,
distort or prevent free competition which ultimately cause harm to the consumers. Franchise agreements are therefore subject to the competition laws as well.
Other practices: The following may also be regulated by franchise relationship laws:
obtaining general releases from liability, or waiver of any written or verbal representations; restricting the right of free association among franchisees, discriminating among franchisees imposing unreasonable standards of performance on franchisees.
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