Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.

Franchise & Licensing

Angola Small Flag Angola

Law 18/03 does not foresee any requirements prior to the offer and / or sale of a franchise. It is worth noting, however, that the Angolan Civil Code provides a general duty of good faith that parties should observe when negotiating and concluding a contract, the so-called pre-contractual period, which is foreseen in article 227, 1 of the Civil Code. According to this, parties are subject to three kinds of duties: i) protection duties: parties should refrain from undertaking any action that may harm (personally or financially) the counterparty; ii) information duties: namely regarding the circumstances that might be relevant for the agreement to be reached (especially when there is an unbalanced position between a stronger and a weaker party); iii) loyalty duties: which comprises the obligation to avoid behaviours that can be deemed disloyal to the other party, for instance, when a party has legitimate reasons to believe that a contract will be signed and suddenly negotiations are abruptly interrupted.

Canada Small Flag Canada

There are no requirements that must be met by a franchisor prior to the offer and/or sale of a franchise other than the disclosure requirements specified in each provincial franchise disclosure law. Please refer to Question “4”, below, for further information on these disclosure requirements.

Chile Small Flag Chile

There are no special requirements to be met prior the offer and/or sale of a franchise, as there is no specific law or regulation that subjects a franchisor to general or formal pre-contract disclosure requirements. However, please note that the general rules and principles of good faith governed by the Chilean Civil Code apply, which require the parties to disclose to each other all matters relating to the future agreement that will be material to the other party's final decision to execute the agreement.

Azerbaijan Small Flag Azerbaijan

N/A

Denmark Small Flag Denmark

There is no specific legislation nor any governmental agencies regulating the offer and sale of a franchise.

France Small Flag France

A franchisor has a duty to test the business and concept in question prior to offering it for franchise. The franchisor will usually be required to establish that the concept/business model has been operating for at least two years and has been profitable.

Additionally, Article L. 330-3 of the Commercial Code requires certain pre-contractual disclosures before the execution of a franchising agreement. These pre-contractual disclosures extend to all contracts which grant to another party the use of a trade name, brand or corporate name while also requiring some sort of exclusivity or quasi-exclusivity undertaking in order to carry out their activity. This requirement, which was codified in the Commercial Code in an attempt to reinforce the concept of fairness, is in place to protect the weaker party by enabling it to commit to the contract with a full knowledge of the facts. Article 1112-1 of the Civil Code by extension also creates an affirmative duty for a party to disclose any information which may be material to other party’s consent to the contact.

The pre-contractual disclosures are made in one document called a Document d'Information Pré-contractuelle (‘DIP’). The specific elements to be included in the DIP are set forth in Article R 330-1 of the Commercial Code.

Failure to meet these disclosure requirements can result in an annulment of the contract.

For more information, see question 4.

Egypt Small Flag Egypt

Due to the fact that there is no specific legislation regulating franchising as indicated under Question No.1 above, accordingly, the composition of the contract shall be referred to the provisions of the Egyptian Civil Code. The Egyptian Civil Code is considered the backbone and main source of all the legal rules applicable to contracts and execution thereof. In this regard, Article (89) of the Egyptian Civil Code states that “The contract shall be concluded once the two parties exchange the expression of the two wills, subject to other specific terms to be further prescribed by the law for concluding the contact “. This means that the contract exists after the exchange of offer and acceptance, as for the pre-period, negotiations are not considered obligatory to the parties thereof. This principle was provided by the Egyptian Court of Cassation in Challenge No. 1733 of 53 J which emphasizes no consideration will be regarded for pre-contract negotiations and the contract will be deemed concluded once the parties’ will are matched.

Greece Small Flag Greece

Greek law does not contain any provisions regarding the requirements that must be met prior to the offer or sale of a franchise. The general provisions of articles 197 - 198 of the Greek Civil Code apply, according to which at the stage of negotiations the parties must act in good faith and in accordance with business morals. The Franchise Association of Greece has adopted a Code of Ethics which was based on the European Code of Ethics for Franchising. According to the Greek Code of Ethics, the franchisor a) must have operated a business concept with success, for a reasonable time and in at least one pilot unit before starting its franchise network and b) must be the owner of, or have legal rights to use, its network’s trade name, trade mark or other distinguishing identification. Said Code however, is not legally binding. Failure to comply with its provisions may only lead to disciplinary sanctions against a member of the Association.

Lebanon Small Flag Lebanon

In principle, there are no pre-offer requirements other than having a corporate structure with a fully comprehensive and defined concept to act as the franchisor, in addition to another local corporate structure experienced in the franchisor’s field of work (such experience will be proved through portfolios and feasibility studies of the potential franchisee).

China Small Flag China

Yes. There are three pre-conditions for offering a franchise, namely (1) any organisation and individual other than an enterprise are not qualified as a franchisor under the applicable PRC laws, (2) a franchisor must possess a matured business model and have the ability to provide continual operational guidance, technical support, business training, and other service support to the franchisee; and (3) a franchisor must operate at least two self-owned stores for more than one year (namely, “2+1 Rule”).

Where a franchisor fails to satisfy the 2nd requirement before offering a franchise, the competent commerce administration authorities (Ministry of Commerce or its local branch, as the case maybe, hereinafter referred to as “Commerce Administration Authorities”) shall order the franchisor to make correction, confiscate the illegal income, impose a fine ranging from RMB100,000 to RMB500,000 and make a public announcement. Where any organisation or individual other than an enterprise engages in franchise operations in the capacity of a franchisor, the Commerce Administration Authorities shall order such organisation or individual to cease the illegal business activities, confiscate the illegal income and impose a fine ranging from RMB100,000 to RMB500,000.

Mexico Small Flag Mexico

In terms of the IPL, it is required to provide the prospective franchisee with a disclosure document at least 30 business days prior to the execution of the relevant franchise agreement, which must contain the information listed in the response to question 4 below.

Failure of a franchisor to comply with this disclosure obligation on time, and after having received a written request by the prospective franchisee to receive such information, may result in the imposition of a fine by the Mexican Institute of Industrial Property, which is Mexico’s Trademark Office (known as IMPI by its acronym in Spanish).

In the event that the information provided in the disclosure document lacks veracity, the franchisee may request, through a judicial process, the nullity of the franchise agreement, as well as to claim the payment for damages and losses caused for such lack of veracity.

Peru Small Flag Peru

There are no requirements provided by law that must be met before a business can sell a franchise. However, it is recommended that before the franchisor decides to grant rights to develop a franchise business, the relevant trademarks relating to the franchise are registered before the National Institute for the Defence of Free Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y Proteccion de la Propiedad Intelectual – INDECOPI).

Philippines Small Flag Philippines

There are no prerequisites to the offer and/or sale of a franchise in the Philippines.

Russia Small Flag Russia

The main requirement is to have a commercial establishment (entity) operating in good standing, since non-commercial entities or organizations are not authorized to do business in the format of franchising. There is no need to set up and register a special business entity in Russia, or open a local branch office, as franchise can be offered and sold from abroad through a direct franchising or sub-franchising.

The second requirement is the protected trademark and other IP rights, as noted above. A franchise is always a grant of bundle of IP rights, where trademark is the most important licensed asset. Registration, whether on the national level or via international agreements, is required for only trademarks and patents.

Finally, it is crucial to have an appropriate and written form of agreement – franchise agreement. If the form of contract is not complied with, the franchise will be deemed invalid (void).

United States Small Flag United States

Requirements

The Federal Trade Commission (the “FTC”) Franchise Rule (the “FTC Rule”), which regulates franchising at the federal level, requires franchisors to prepare a franchise disclosure document (“FDD”) and furnish it to prospective franchisees no less than 14 days before any contract is signed or any monetary consideration is exchanged. The FDD must take the particular format specified by the FTC and must contain various disclosures concerning the franchisor, the franchisee’s investment and the material terms governing the contractual arrangement between franchisor and franchisee. Together, the information disclosed in the FDD and the uniform prescribed format of the FDD (which format facilitates a brand-against-brand offering comparison) are designed to enable a prospective franchisee to make an informed investment decision. The FTC Rule’s pre-sale disclosure obligation applies to the offer and sale of franchise opportunities in each of the 50 states, Washington D.C., and all U.S. territories.

Notwithstanding the 14 day pre-sale waiting period prescribed by the FTC Rule, certain state laws require that the FDD be furnished to prospective franchisees earlier in the sales process. By way of example, New York requires prospective franchisees to be disclosed at the earlier of the first personal meeting or 10 business days before the execution of the franchise or other agreement or the payment of any consideration. Also, Michigan requires prospective franchisees to be disclosed at least 10 business days before the execution of any binding franchise or other agreement or the payment of any consideration, whichever occurs first.

In addition to the pre-sale disclosure obligation under the FTC Rule, the following 14 states have their own franchise registration and disclosure laws that impose additional requirements on franchisors: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. In order to offer and/or sell franchises in these states, a franchisor must first file for registration (or an exemption therefrom) and secure state approval.

Further, 26 states (Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia and Washington) have enacted “business opportunity” laws that do not specifically regulate franchising but, rather, regulate the sale of opportunities to engage in new business ventures (which, by definition in many cases, includes franchises). Most of these business opportunity laws prohibit the sale of business opportunities unless the seller gives potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency. The disclosures required by state business opportunity laws differ from and are usually less onerous than those required by the FTC Rule and state franchise laws. Unlike the franchise registration and disclosure laws, however, some business opportunity laws impose security bonding requirements on the offeror to cover certain investor losses.

In many states, franchise offerings are explicitly excluded from business opportunity law coverage if the franchisor complies with federal or state franchise sales laws, rules and regulations. In other states, however, even if the franchisor complies with applicable franchise laws, the offering will nevertheless be regulated by business opportunity laws if the franchisor makes certain representations during the course of selling a franchise. Further, in some states (e.g., in Connecticut, Georgia, Louisiana, Maine, North Carolina and South Carolina), franchise offerings fall outside the definitional scope of business opportunity laws where the franchisor is licensing a federally registered or state-registered trademark.

Consequences for Failure to Comply

Failure to comply with the FTC Rule’s pre-sale disclosure obligation constitutes an unfair or deceptive trade practice under §5 of the Federal Trade Commission Act of 1914, as amended (the “FTC Act”) and could subject a franchisor to investigations, enforcement actions and fines of up to $40,000 per violation. While there is no private right of action under the FTC Rule, a franchisee who was not properly disclosed or who purchased a franchise relying upon misleading or incomplete information may be able to bring claims against its franchisor under applicable state franchise laws (assuming the particular state at issue has a registration and disclosure law and statutorily prohibits misleading and/or fraudulent disclosures).

In addition, many states (including states with no franchise laws or regulations of their own) have enacted statutes, colloquially referred to as “Little FTC Acts,” which render illegal any conduct that would be violative of the FTC Act and the regulations promulgated thereunder (including the FTC Rule). Unlike the FTC Act and the FTC Rule, however, these Little FTC Acts often confer private rights of action upon aggrieved franchisees (either expressly by statute or by virtue of case law that has conferred standing under such statutes) instead of reserving those rights to governmental authorities alone. Thus, if a franchisor violates the FTC Rule, the franchisee may attempt to hold the franchisor liable under such state Little FTC Acts, which typically permit the franchisee to sue for damages, rescission (i.e., essentially nullifying the franchise agreement and restoring the franchisee to the same position it would be in had it never acquired the franchise) and legal fees and expenses, as well as under applicable state franchise registration and disclosure laws.

New Zealand Small Flag New Zealand

In order to sell an existing franchised business the franchisee must have the business ready for sale. There are no legal requirements in New Zealand but there are practical requirements like having all legal documentation available and completed and, most importantly, know how the assignment or sale process will work and complying with the franchisor’s requirements. The potential consequences for failing to comply include not obtaining the consent of the franchisor to a sale and appearing to be unprofessional or unprepared to a potential purchaser.

Norway Small Flag Norway

By offer/sale of a franchise is understood the process and agreement leading up to a franchisee entering into an agreement with a franchisor. Based on this understanding there are no franchise specific requirements that must be met prior to the offer and/or sale of a franchise. However, from a general contract law perspective, the seller/franchisor should provide truthful information relevant for the franchisee and the transaction. This applies particularly upon specific information requests from the franchisee.

Please note that for sale of existing franchises/branches, there could be competition law requirements. This includes filing of notifications to the competition authorities if the franchise has a dominant position in the market or certain revenue-based conditions are met by the parties involved in the transaction. Transfer of existing franchises/branches could also trigger information requirements to the employees, if the transaction is done as an asset transfer transaction or as part of a merger or de-merger process, as opposed to a share transfer transaction.

Italy Small Flag Italy

Requires the franchisor, before starting its franchise network, must have tested its business concept on the market (Art. 3.2 of the Franchise Law). This rules is mandatory. In case of violation by the franchisor, the contract may be declared null and void and the franchisee may be entitled to claim for the related damages.

The testing period must last at least one fiscal year. A test carried out abroad by a foreign franchisor is considered suitable to fulfil the requirement.

United Kingdom Small Flag United Kingdom

In the UK the principle of 'buyer beware' applies, meaning that it is the buyer's responsibility to undertake sufficient due-diligence on the transaction they are entering into. There are no specific statutory requirements that must be met prior to the offer and/or sale of a franchise.

If the franchisor is a member of the BFA, then the franchisor must have operated at least one pilot unit for a reasonable time prior to granting franchises to demonstrate that the business concept is successful.

Updated: October 15, 2019