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In foreign countries, franchises have a history of more than one hundred years and are now a mature and popular business mode, especially in developed countries. They are developing fast in China, covering more than sixty industries and trades such as catering, retailing, clothes-washing, indoor decorations and gyms. The number of franchised shops is about 200,000. The development of franchises plays a positive role in adjusting and improving the circulation structure, promoting the creation of businesses and development of media and small enterprises, and enlarging employment. However, the franchise market is chaotic in some industries and areas with illegal and criminal activities conducted under the guise of franchises. Though the saying that ¡°there are nine traps in ten franchising activities¡± is an exaggeration, it does reflect reality to some extent.
To regulate commercial franchising activities, steering commercial franchises to develop in a healthy and orderly manner, while protecting the market order, the State Council promulgated the ¡°Measures on the Administration of Commercial Franchises¡± (the ¡°Measures¡±) on 6 February 2007, which came into force on 1 May 2007. In addition, the Ministry of Commerce promulgated the ¡°Measures on the Administration of the Archival Filing of Commercial Franchises¡± and the ¡°Measures on the Administration of Information Disclosure in Commercial Franchises¡± on 30 April 2007, which have been implemented at the same time as the Measures.
The Measures Re-define The Qualifications Of Franchisors
The Measures define the franchisors as enterprises which own business sources such as registered trademarks, enterprise logos, patents and proprietary technology, defined by the Ministry of Commerce and even the former Department of Trading as enterprises and other economic organizations with business sources such as trademarks, trade names and business modes to be granted to others. The changes, although tiny, reflect the government¡¯s effort to further regulate franchises.
Firstly, the franchisors shall be enterprises, excluding other economic organizations. Any entities other than enterprises or individuals are still not allowed to carry on franchising activities. It is a necessary measure to maintain order in the franchising market.
Secondly, the trademarks which can be licensed to franchisees shall be registered. According to the Trademark Law, trademarks, whether registered or not, are protected under the laws, though there is a difference in the degree and extent of protection. It seems that the Ministry of Commerce restricts the recognition of trademarks, since it only provides for ¡°own trademarks to be licensed to others¡± at large, which causes chaos in practice. In many franchising disputes, franchisors license non-registered trademarks or trademarks whose applications for registration are pending. When the trademarks are infringed, the franchisors are unable to stop the infringements and protect the interests of the franchisees. What¡¯s more, franchising activities with non-registered trademarks also, to some extent, encourage commercial fraud.
Thirdly, the logos, patents and proprietary technology of enterprises are included in the business sources to be licensed to others for the first time, which enlarges the application scope of franchises and will improve the development of franchises.
The Measures Clearly Stipulate The Requirements For Franchising Activities
In addition to the condition that only enterprises are be allowed to carry on franchising activities, the franchisors shall also have mature business modes, and be able to provide business guidance, technology support and training. Enterprises which copy the manuals, websites and documents of others, and have no ability to provide business guidance, technology support and training shall be excluded. What needs to be pointed out is that even enterprises which are allowed to engage in this business may face unfair competition and intellectual property rights infringement suits. In addition, the Measures clearly request that the franchisors shall operate at least two directly operated shops, and the period of operation shall be more than one year, which aims to prevent fraud by way of franchising.
The Measures Tighten Information Disclosure Requirements And Regulations On Franchisors
The information disclosure system is the core of franchising. The previous measures on the administration of franchises also provided rules for the information disclosure system, but they were not implemented effectively. The Measures provide that the franchisors shall establish and implement a perfect information disclosure system, and provide relevant information and franchising contracts in writing, at least thirty days before the execution of franchising contracts. They also set out specific provisions on the information which shall be provided by franchisors, including their basic conditions and commercial reputation records and those of their legal representatives, business sources owned by franchisors, abilities of franchisors to provide service to franchisees and management and supervision of the business of franchisees, franchisee fees, and the payments and budgets for investment in franchising shops. The Measures on the Administration of Information Disclosure of Commercial Franchises make detailed requirements on the above aspects. Franchisors that violate these provisions will be ordered by the authorities in charge of commerce to make rectification, and will be penalized and ordered to make public statements.
In recent years, franchises have been incorrectly perceived as an area of easy profits. Attractive advertisements invited investment while there were many cases infringing the rights and interests of franchisees. The Measures set specific requirements on the activities of franchisors, in response to the characteristics of franchises and main practical issues, including (1) operation manuals which shall be provided by franchisors to franchisees as well as business guidance, technology support and training; (2) if franchisors request franchisees to make payments before the execution of franchising contracts, they shall explain, in writing, the use of the money, and the conditions and ways of refund; (3) the franchisors shall use the promotion fees charged on franchisees in the way agreed by the parties, and disclose the way of their use to franchisees in time; (4) no fraud or misleading activities in promotion are allowed and there shall be no description of profit in advertisements published by them; and so on.
The Archival Filing And Public Announcement Systems
To protect the franchisees¡¯ lawful rights and interests, consider the asymmetric information between franchisors and franchisees, and tighten information disclosure requirements and regulate the activities of franchisors, the Measures also establish an archival filing and public announcement system. The Measures provide that the franchisors shall file the relevant documents with the commerce administrative department within 15 days after the execution of franchising contracts for the first time. Anyone who intends to engage in any commercial franchise activities within a province, autonomous region, or municipality directly under the Central Government shall complete the archival filing formalities in the commerce administrative department of the people¡¯s government of the province, autonomous region or municipality directly under the Central Government where the franchisors are located. Anyone who intends to engage in any commercial franchise activities beyond a province, autonomous region or municipality directly under the Central Government shall complete the archival filing formalities in the commerce administrative department of the State Council. Any franchisor engaging in franchise activities before 1 May 2007 shall apply for archival filing at the commercial administrative department.
The Ministry of Commerce has established a national network for archival filing work related to commercial franchises. Any franchisor shall go through the archival formalities through the government website. The general public may obtain information through the website of the Ministry of Commerce related to: (1) registered trademark(s), enterprise mark(s), patent(s), know-how and other business resources of the franchisor; (2) franchisor¡¯s archival filing date; (3) location of the legal business place, contact information and name of the legal representative of the franchisor; and (4) location of the business place of the franchisee(s) within China.
The authorities in charge of filing will cancel the archival filing and make a public announcement on the government website if: (1) business licences of franchisors have been withdrawn by the registration administrative authorities due to illegal operations; (2) the authorities in charge of filing receive a judicial suggestion letter cancelling archival filing due to illegal activities of franchisors; (3) franchisors conceal relevant information or provide false information, which has been proved; (4) franchisors cancel by themselves. In addition, the illegal activities of the franchisors will be announced to the public.
Bailey Xu
Haworth & Lexon |