Intellectual Property

Selling a company's goods or services with the proper legal authorization, known as franchising, is an important and successful form of business. However, as in any business deal, it is vital to protect oneself by becoming well informed. Sound, upfront franchise business advice and counsel is critical to a franchisee's long-term success.

China has the most franchises in the world but the scale of their operations is relatively small. Each system in China has an average of 43 outlets, compared to more than 540 in the United States. Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant foreign entry in 1987 and is widespread Many franchises are in fact joint-ventures, as at their forming the franchise law was not explicit. For example, McDonalds is a joint venture. Pizza Hut, TGIF, Wal-mart, Starbucks followed a little later. But total franchising is only 3% of retail trade, which seeks foreign franchise growth.

The year 2005 saw the birth of an updated franchise law, "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made no specific inclusion of foreign investors. Today the franchise law is much clearer by virtue of the 2007 law, a revision of the 2005 law.

The laws are applicable if there are transactions involving a trademark combined with payments with many obligations on the franchisor. The law comprises 42 articles and 8 chapters.

Among the franchisor obligations are:

  • The FIE (foreign-invested enterprise) franchisor must be registered by the regulator
  • The franchisor (or its subsidiary) must have operated at least operated two company-owned franchises in China (revised to "anywhere")for more than 12 months ("the two-store, one-year” rule)
  • The franchisor must disclosure any information requested by the franchisee
  • Cross-border franchising, with some caveats, is possible (2007 law).

The franchisor must meet a list of requirements for registration, among which are:

  • The standard franchise agreement, working manual and working capital requirements,
  • A track-record of operations, and ample ability to supply materials,
  • The ability to train the Chinese personnel and provide
  • Long-term operational guidance,
  • The franchise agreement must have a minimum three-year term.

Among other provisions:

  • The franchisor is liable for certain actions of its suppliers
  • Monetary and other penalties apply for infractions of the regulations.

The disclosure has to take place 20 days in advance. It has to contain:

  • Details of the franchisor’s experience in the franchised business with scope of business
  • Identification of the franchisor’s principal officers
  • Litigation of the franchisor during the past five years
  • Full details about all franchise fees
  • The amount of a franchisee’s initial investment
  • A list of the goods or services the franchisor can supply, and the terms of supply
  • The training franchisees will receive
  • Information about the trademarks,including registration, usage, and litigation
  • Demonstration of the franchisor’s capabilities to provide training and guidance
  • Statistics about existing units, including number, locations, and operational results, and the percentage of franchises that have been terminated, and
  • An audited financial report and tax information (for an unspecified period of time).

Other elements of this legislation are:

  • The franchisee’s confidentiality obligations continue indefinitely after termination or expiration of the franchise agreement
  • If the franchisee has paid a deposit to the franchisor, it must be refunded on termination of the franchise agreement; upon termination, the franchisee is prohibited from continuing to use the franchisor’s marks.

Under China law, each side pays for its own attorneys fees unless a contract says that one side or the other gets attorneys fees if there is a lawsuit or there is a provision in a special statute that gives you the right to get fees. Many franchise laws give franchisees the right to get fees if they win. Many franchise agreements say that the winning party collects its fees from the other side. We will look at your particular situation to assist you in understanding your rights to attorneys fees.

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