A franchise business is a business in which the owners or “franchisors” authorise the use of their logo, name, brand and other intellectual property rights as well as their business model and all information required to operate the business to third party retail outlets owned by independent operators called “franchisees”. The franchisor receives lump sum payments (or entry fees) agreed in advance for each new outlet and royalties usually based on the franchised business’ turnover.
A license business is a business in which the owners or “licensors” authorise third-party independent operators called “licensees” to use their logo, name, brand and other intellectual property rights in consideration of the payment of royalties, usually based on the revenue generated by the licensed intellectual property rights.
EXPANSION IN PACIFIC ASIA
The franchising industry is continuously growing in Asia Pacific and has a significant impact on the local economy. For instance, in the Philippines, the annual turnover in franchising is expected to grow to US$24 billion by 2020 with an annual growth rate of 10%. Development of international franchising networks is versatile in forms and methods. It ranges from single-unit franchise (the franchisor grants to the franchisee the right to implement and operate one franchise), multi-unit franchises (the franchisor grants to the franchisee the right to implement and operate several franchised businesses) to master franchise agreements (an international franchisor contracts with one master-franchisee for all or part of the region who then contracts with local sub-franchisees in various jurisdictions).
LEGAL FRAMEWORK IN PACIFIC ASIA
Local legislations on franchising vary from one jurisdiction to another. For instance, there are no regulations in Singapore or in the Philippines, but there is a statutory registration and control of the franchise substance in Malaysia. In many jurisdictions, local professionals have formed organisations such as the Philippines Franchise Association in the Philippines (http://www.pfa.org.ph/), the Malaysian Franchise Association in Malaysia (http://www.mfa.org.my/newmfa/code-of-ethics/) or the Franchising and Licensing Association in Singapore (http://www.flasingapore.org/). Each of these organisations has adopted good practice guidelines or codes of ethics to promote and facilitate the use of franchising.
Guidelines enacted by these organisations contain similar key provisions including:
- compliance with laws and regulations of the relevant country;
- provision of a written franchise agreement;
- prohibition of the imitation of other trademarks, name of business, corporate identity, etc. belonging to other franchisors;
- prohibition of misleading information concerning the business of the franchisor;
- disclosure of information to the franchisee before the signing of the franchise, notably:
- information concerning the franchisor’s business (description of the business concept, current operations, contact number of existing franchisees, etc.);
- financial obligations of the franchisee;
- performance of the outlets managed by the franchisor and eventually performance of the franchisees in other jurisdictions;
- obligations of the franchisor (quality of the information and support provided to the franchisee).
In addition, some codes of ethics such as the guidelines issued by the Franchising and Licensing Association contain detailed provisions regulating the relationship between the franchisor and the franchisee, and more precisely the transferability of franchise, notices in case of breach, time for remedy and conditions for termination.
License agreements are generally not the subject of specific regulations.
LACK OF UNIFIED LAW OF TRADEMARKS IN PACIFIC ASIA
Apart from the various local regulations, the development of franchise and license networks in Asia Pacific presents one specific challenge due to the absence of one unified intellectual property system similar to the EUIPO (European Union Intellectual Property Office). Although most jurisdictions are members of the Madrid Union which enables one unique application for international registration of a trademark in multiple member jurisdictions, there are exceptions and local specificities to take into account. Hong Kong, Macau, Taiwan and South Korea are not members of the Madrid Union. The People’s Republic of China is a member but any enforcement of intellectual property rights requires the localisation of the registration.
TAKING INTO ACCOUNT BILATERAL TAX CONVENTIONS (DEDUCTED AT THE SOURCE)
Bilateral taxation agreements add another layer of complexity as entry fees and royalties are likely to be subject to withholding tax provisions in many local jurisdictions with a lower rate applicable upon presentation of a tax residency certificate of the franchisor or licensor.
HOW CAN WE HELP?
Over years of practice in Hong Kong, we have assisted clients’ regional headquarters in the review of their standard franchise or license contract to take into account local regulations and experience. Contracts are generally subject to Hong Kong law and we usually cooperate with the franchisee’s or licensee’s local lawyer with regard to local regulations.
We help our clients to put in place good practices which are suitable for most Asia Pacific jurisdictions, including:
- standard non-disclosure agreement to be entered early on in the process, prior to sharing information to enable the potential franchisee to perform preliminary feasibility, market and profitability studies of the franchise business model in its jurisdiction;
- standard memorandum of understanding prior to sharing more sensitive information on the business model and costs; we recommend the memorandum of understanding to include provisions for payment of a deposit or advance payment of a fraction of the entry fee as an indication of the commitment of the potential franchisee;
- standard franchise or license agreement (individual, master or multi-units agreement).
Fixed fees may be agreed for the drafting of the templates referred to above. Review and amendments of existing standard documents will usually be on an hourly rate, unless the scope of the review is clearly defined. Negotiations or support for negotiations is invoiced based on hourly rates.