Is there a legal definition of a franchise and, if so, what is it?
Franchise & Licensing
Yes, we confirm that franchise agreements are governed and defined by Law 18/03, of 12 August 2003, which applies to the Distribution, Agency, Franchising and Commercial Concession Contracts (hereinafter briefly referred to as “Law 18/03”). Article 37, 1 of the referred law defines franchising as “(…) the contract by which a person (individual or a legal entity) assigns to other (the franchisee or licensee), with compensation, the commercialization of the franchisor’s goods or services, through the use of the trademark and further distinctive signals of the franchisor, according to the plan, methods and guidelines prescribed by the franchisor.”
The franchise legislation in each of the six Canadian provinces that have enacted such legislation contains its own specific definition of ‘franchise’, but each such definition includes two separate formulations. The first (dealing with business format franchises) entails:
• a right to engage in a business in which the franchisee makes a payment or series of payments to the franchisor;
• the franchisee having the right to sell (or offer for sale) goods or services that are substantially associated with the franchisor’s trademark, trade name or other commercial symbol; and
• the franchisor exerting significant control over, or offering significant assistance in, the franchisee’s method of operation.
This definition is quite broad and covers many relationships beyond what may generally be understood as a classic franchise.
The second formulation (dealing with business opportunities) expands the net even further to capture arrangements where the franchisor grants the franchisee representational or distribution rights, no matter whether a trademark, trade name or other commercial symbol is involved, to sell (or offer for sale) goods or services supplied by the franchisor or by a supplier that it designates, and where the franchisor or a designated third person provides location assistance to the franchisee, whether by securing retail outlets or accounts or by securing locations for vending machines, display racks or other product sales displays.
Local laws and regulations do not provide a legal definition of franchise.
Franchising is defined by Article 723 of the Civil Code of the Republic of Azerbaijan as follows:
Franchising agreement is a mutual long-term liability undertaken by independent parties to perform specific actions contributing to production, sale of goods and provision of services, when necessary.
There is no official or statutory definition of a franchise. However, the Danish franchise association, "Franchise Denmark", uses the following definition in its Code of Ethics for Franchising, which is a Danish translation based upon the definition of franchising set out in the European Code of Ethics for Franchising adopted by the European Franchise Federation:
"Franchising is a system for marketing goods and/or services and/or technology, which is based upon a close and on-going collaboration between legally and financially separate as well as independent undertakings, the franchisor and its individual franchisees, whereby the franchisor grants its individual franchisees the right, and imposes the obligation, to conduct a business in accordance with the franchisor's concept."
There is no legal definition of franchise under French law. Instead, case law defines a franchise agreement as a relationship characterized by the existence of these three elements:
i) A trade mark license
ii) The communication of specific know-how
iii) Assistance provided to the franchisee by the franchisor
Additionally, the European Code of Ethics for Franchising provides a definition for franchising. Although it has no legal force under French Law, it may be referred to as a guiding authority, for example, to define the meaning of ‘know-how’. The French Franchise Federation (‘FFF’) promotes compliance with the European Code of Ethics for Franchising.
Due to the major economic changes in all countries around the world the franchise system has become very much in demand, a business sought after for the latest top brands in the different market fields, including without limitation, fashion, technology, food stuff, beverages, home appliances etc.. all of which may be provided through franchise.. However, to date, there is actually no specific legislation in Egypt or regulation governing franchising, yet it could be described as a business relationship through which the franchisor grants the franchisee a franchise right within an agreed upon period i.e. the contract term, the license to use the franchisor’s commercial rights for example know-how, trademarks and brands etc.. thereby permitting the franchisee to sell and market the franchisor’s goods or services in a specific jurisdiction, and incompliance with the franchisor’s business plans and guidelines, in consideration thereof , the franchisee pays the franchisor an agreed upon royalty for the franchise right.
Greek law does not provide a definition of franchise. However, Greek courts in principle have adopted a definition along the following lines: “Franchising means an agreement of ongoing cooperation between two independent undertakings, which from an economic aspect, constitutes a method of marketing products or services whereby one undertaking (franchisor) grants to another (franchisee), for a definite or indefinite period of time and for a direct or indirect economic consideration, the right to exploit a so called franchising "package", for the sale of goods or the provision of services to end users. A franchising package means a package of industrial and intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyright, patents and know-how or other rights, such as rights of being supplied with products from specific producers, rights for the use or the exploitation of stores, equipment etc.”.
Lebanese law does not provide specific regulations regarding franchising and does not provide a specific definition of franchise agreements. However, the Beirut Court of Appeal defined franchise agreements in its Decision No. 1106/2009 of July 30, 2009, and there has been other important case-law which has clearly identified the characteristics and components of franchise agreements.
According to the Decision No. 1106/2009 Court of Appeal in Beirut:
Franchise is the grant of a right to use a trademark in connection with the manufacturing and/or the distribution of products and/or provision of services; together with the transfer of a certain know-how from the franchisor to the franchisee; and the cooperation between the parties.
Also, the Court of First Instance in Beirut, Decision No. 28/92 dated January 30,/1992 defined a franchise as an agreement between a trader engaged in wholesale trade and a person who wants to use retail trade independently or for his own account. The franchisor then facilitates the formation of a commercial shop that is owned by the franchisee and gives him the right to sell goods of a well-known brand with the right to use this brand and the trade name in his shop, provided that the franchisee refrains from selling other goods competing with this brand.
Another definition of franchise can be found in the Code of Ethics set by the Lebanese Franchise Association which states:
“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 franchisees 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 the parties to this purpose.”
Yes. There is a legal definition of “commercial franchise”.
The term “commercial franchise” (hereafter “franchise”) shall refer to the arrangement whereby a franchisor, through the conclusion of a contract, authorizes a franchisee to use the business resources its owned such as the registered trademark, trade name, patent and business model and a franchisee conducts its business under a uniform business system in accordance with the provisions of the contract and pay the franchisor franchise fees/royalties.
Article 142 of the Industrial Property Law (IPL) provides a definition of a franchise stating that “a franchise exists whenever, in conjunction with a licence to use a trademark granted in writing, technical knowledge is transmitted or technical assistance is furnished in order to enable the franchisee to produce or sell goods or render services in a uniform manner and with the operating, commercial and administrative methods established by the holder of the trademark, with the goal of maintaining the quality, prestige and image of the products or services distinguished by the trademark”.
No, there is no legal definition of a franchising and/or a franchise under Peruvian law. However, Peruvian business and legal practice has understood franchise agreements to be arrangements through which a franchisor grants a franchisee the right to reproduce, under the franchisor’s assistance, a system previously developed by the franchisor. That system is distinguished by the franchisor’s trademarks.
There is no statutory definition of a franchise in the Philippines as there is currently no specific local law on business franchising. However, the Philippine Department of Trade and Industry (“DTI”) issued on 17 November 2010 Bureau Order No. 10-24, a non-binding advisory on franchising, which defines the term “franchising agreement” as “a written contract or agreement between two or more parties by which a Franchisor grants the Franchisee a right to engage in the business of offering, selling, or distributing goods or services under a marketing plan/system/concept, for a certain consideration. Unless otherwise provided, said right includes the use of a trademark, service mark, trade name/business name, know-how, logo-type advertising, or other commercial symbols associated with a particular business.”
Under the Intellectual Property Code of the Philippines (“IP Code”), “franchise agreements” may also be considered as “technology transfer arrangements” which are “contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market.”
Russian law does not operate the term “franchise”. Instead, the term “commercial concession” is used and provided in the local law to define the relationship of the parties concerning franchising.
According to Article 1027 of the Russian Civil Code, under the contract of commercial concession one party (rights holder) shall grant the other party (user), for a compensation and for a definite or indefinite term, the right to use in the business of the user a set of intellectual property (IP) rights owned by the rights holder, including trademark rights, service mark rights, and other intellectual property rights, in particular, trade name, secret of production (know-how).
The key element of the contract of commercial concession (hereinafter – “franchise agreement” or “franchise”) is a trademark. Other IP rights, including but not limited to trade names, copyrights, patents and know-how, must be included in the scope of the franchise in addition to the trademark.
Franchising in the United States is regulated at both the federal and state level.
At the federal level, franchising is regulated by the Federal Trade Commission (the “FTC”) under the FTC Franchise Rule – 16 C.F.R. §436.1 et seq. (the “FTC Rule”), which applies to franchise opportunities in each of the 50 states, Washington D.C., and all U.S. territories. The FTC Rule defines a “franchise” as a continuing commercial relationship created by any arrangement where:
- the franchisee obtains a license to operate a business identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services or commodities that are identified or associated with the franchisor’s trademark or that must meet the franchisor’s quality standards;
- the franchisor exercises, or has the right to exercise, significant control over, or gives the franchisee significant assistance in, the franchisee’s method of operation; and,
- the franchisee, as a condition of obtaining or commencing the franchise operation, is required to make payments to the franchisor or an affiliate aggregating $570 or more at any time prior to or within six months after commencing operation of the franchisee’s business.
Thus, a business arrangement meets the FTC Rule’s definition of a franchise if it involves: (i) the grant of a trademark; (ii) the franchisor exerts or has the authority to exert significant control or assistance over the operation of the business; and, (iii) the franchisee is required to pay the franchisor or its affiliate a fee.
While on the state level there is no single uniform definition of a “franchise,” the various state definitions largely resemble the FTC Rule’s definition of a franchise. Specifically, the federal “grant of a trademark license” and “payment of a fee” elements are fundamentally the same at the state level. State franchise laws, however, replace the middle definitional element of “substantial assistance or control” either with the requirement that there be a “marketing plan prescribed in substantial part by the franchisor” or, in a minority of states, “a community of interest between the parties.”
Importantly, notwithstanding the foregoing, under New York’s franchise registration and disclosure law, a “franchise” will exist if there is the: (i) payment of a fee, and either (ii) the grant of a trademark license or the existence of a marketing plan/system prescribed in substantial part by the franchisor. Based on New York’s two-prong approach, in the absence of an applicable exemption, trademark license agreements in New York may be subject to the application of New York’s franchise registration and disclosure law.
The definition of “franchise” as contained in the Rules of the FANZ is as follows:
“Franchise” means the method of conducting business under which the right to engage in the offering, selling or distributing of goods or services within New Zealand includes or is subject to at least the following features:
• the grant by a Franchisor to a Franchisee of the right to the use of a Mark, in such a manner that the business carried on by the Franchisee is or is capable of being identified by the public as being substantially associated with a Mark identifying, commonly connected with or controlled by the Franchisor; and
• the requirement that the Franchisee conducts the business or that part of the business subject to the Franchise Agreement, in accordance with the marketing, business or technical plan or system specified by the Franchisor; and
• the provision by the Franchisor of ongoing marketing, business or technical assistance during the term of the Franchise Agreement."
Consideration should also be given to the definition of a Franchise Agreement which “means a contract, agreement or arrangement, whether express or implied, whether written or oral, between two or more persons by which one party to the agreement (“the Franchisor”) grants, authorises or permits the other party to the agreement (“the Franchisee”) the right to operate a Franchise. Any contract, agreement or arrangement which purports to be a Franchise Agreement shall be deemed to be a Franchise Agreement for the purpose of this definition, notwithstanding that it may lack any or all of the requirements or attributes referred to in the definition of “Franchise”.
In Norway, franchising and companies operating under franchise concepts (franchisors and franchisees) are not subject to any particular franchise laws. As such there is no legal definition of a franchise under Norwegian law.
In Italy, franchise contracts have a legal definition. The definition of franchise is given by Law No. 129/2004 (hereinafter referred to as the “Franchise Law”) according to which franchising is any agreement “between two legally and financially independent parties, whereby one party grants the other party, in exchange for consideration, the right to use a set of industrial or intellectual property rights, related to trademarks, trade names, shop signs, utility models, industrial designs, copyright, know how, patents, technical and commercial support and assistance, in the view of having the Franchisee joining a system characterized by a group of franchisees operating in the territory for the purpose of distributing specific goods and services”.
There is no legal definition of a franchise in the UK. Common law would regard a franchise agreement as a hybrid contract which incorporates various elements from other commercial contractual arrangements. However, the European Franchise Federation ("EFA") defines franchising as:
[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 Franchisees the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept.
This definition has been adopted by the British Franchise Association ("BFA") and might be taken into consideration by a court in determining the definition, if required.