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Legal briefing notes

Franchise as the way of doing business

In today's world, it is often quite difficult for a businessman to find a product or service which would interest a client, will be recognized and profitable. Many markets are divided by large players who have long known all the features of running a certain business. But even these large players are interested in the extension of their authority and ultimately receive more profit. In this case, the franchise model is able to address the needs of both.

In Russian legislation, regarding a franchise, a separate type of agreement is used, which is called a commercial concession. The possibility of concluding this agreement is established by article 1027 of the Civil Code of the Russian Federation. Only commercial organizations and individual entrepreneurs can be parties to such an agreement. The essence of this agreement is that the right holder (franchisor) provides users (franchisee) with the right to use a set of exclusive rights belonging to the right holder for a fee, including the right to a trademark, service mark as well as business reputation and business experience of the right holder with the ability to determine the scope and territory of use.

What should be decided in advance of the registration of an agreement of commercial concession?

  • The procedure for fixing remuneration. It can be agreed in the form of fixed, one-time and (or) periodic payments, a percentage of revenue, payment of a mark-up on the wholesale price of goods as well as otherwise agreed by the parties that allows you to reliably determine the amount of remuneration.
  • Who conducts the registration in the Russian Federal Service for Intellectual Property. As a general rule, that is the responsibility of the rights holder, but the parties are able to address this issue on their own.
  • What is the scope and territory of use? The right holder and the user can agree on the establishment of a minimum and (or) the maximum scope of use as well as agree on the territory of use. An important thing for agreement is the option of the right holder to compete with the user on its territory as well as the right of the right holder to provide a franchise to other persons in the territory.
  • What are the reciprocal obligations of the right holder and the user? The parties have to decide what information and documents should be transferred to the user, whether the right holder should provide ongoing technical and advisory assistance, would there be any quality control on his part, whether the user should grant the right holder a certain amount of sub-concession as well as other responsibilities that are considered as essential for the parties.

How to minimize the risks in registering a commercial concession?

To protect your interests as parties to the franchise, it is necessary to legally correctly form relationships with your counterparties and specify all possible situations in advance. For the right holder, the choice of the user is the foreground (because of the requirements for the user the right holder has the subsidiary or joint responsibility), as well as a reference to the limitations on the use of the franchise. The main thing for the user is to consolidate in relations between the parties a clear list of actions and methods to support the right holder as well as accountability for non-compliance of this obligation.

Whatever you don't get from the franchisor (right holder) can be used against you.

To avoid disputes, the transmission of information that is the subject of a franchise must be recorded:

  • Prepare bilateral documents that confirm the transmission.
  • Indicate the scope of the transferred rights and the actual content of the information.
  • Agree on the way to transfer in the agreement (all the ways that are agreed by the parties including email, instant messengers, etc.)

The reporting is important

Any more or less serious right owner wants to load up the User with reporting on the use of the subject of franchising. The User has no time to waste on reporting because he needs to earn money so that is why it is necessary to agree on the information to be reported in advance. Ideally, you should agree on the reporting format. Otherwise, the right holder will be able to constantly cause problems for the user, or even completely refuse the contract (especially if a large initial contribution has been agreed, and other forms of remuneration are not provided). For the right holder, it is important to clearly understand for himself the information that should be included in the user's report to be able to assess any potential risks of using a franchise with violations. For that reason, the parties are encouraged to:

  • To simplify the list of the information reported from the franchisee to the franchisor, recording in it the operational criteria both quantitatively and qualitatively under the concession agreement.
  • To harmonize the format and manner of reporting in the agreement.

The responsibilities of the parties

As it is assumed that a franchise is a developed business that is well known among consumers so it should meet certain quality standards. And even if the trademark owner does not the goods (services) himself, but by the person who has acquired the franchise. Russian legislation protects potential consumers of such goods and establishes it in Article 1034 of the Civil Code of the Russian Federation, the obligation of the right holder (franchisor) should sustain the demands for the User (franchisee) the lack of quality of the goods (services) sold (rendered) by the user additionally if the user doesn't have enough money to settle the claims. It needs to be considered that if the user acts as a manufacturer of products (goods) of the right holder, the person who purchased such goods will be able to present his requirements both to the user and to the Right Holder on his own choice. What we should learn from these legal provisions is that the Right Holder must be very careful when he comes to the choice of persons with whom he will conclude commercial concession agreements.

The User (franchisee) should remember that if there are any misunderstandings between the Right Holder (franchisor) and him (for example, due to a lack of awareness of the franchisee of the true subject of the contract and the rights that it provides), the franchisee may violate the exclusive rights of the Copyright Holder and it causes administrative (14.10 of the Code of Administrative Offenses of the Russian Federation) or criminal prosecution (180 of the Criminal Code of the Russian Federation). In both cases, the violation of the Right holder’s rights to means of personalization entails liability and the characterization depends on the cost of copies of counterfeit products or the cost of rights to means of personalization.

Exercise of the right to unilateral refusal to perform the contract by the franchisor (Article 1037 of the Civil Code of the Russian Federation) may be distinguished as a separate type of liability that applies to the franchisee, in the following cases:

  • violation of the terms of the agreement on the quality of goods (services) by the franchisee;
  • gross violation of the instructions and guidelines of the franchisor;
  • violation of the terms of payment of remuneration for the franchise

It is important to know that such a refusal is possible only in case the violation has not been removed after receiving a written request or if the violation was repeated within a year. To better guarantee the interests of the parties, we recommend expanding the list of grounds for unilateral refusal for the franchisee and the franchisor as well as negotiating a reasonable lead time for terminating the relationship.

Advantages of working with us

Working with the specialists of the Tsentralny okrug Law firm gives lots of opportunities:

  • Consultations of specialists and free rapid assessment of the specifics of the business and the situation of the client;
  • Full accompaniment of registration of relations between the parties to franchising, an integrated approach involving experts in various areas of law, risk minimization;
  • Money-back guarantee in case of the results will not be achieved;
  • Efficient and responsible case management (34 completed projects during the last year).

Due to our vast experience in the area of franchising the specialists of the Tsentralny Okrug Law Firm quickly and accurately accompany the preparation of all the required documents and register in the Russian Federal Service for Intellectual Property. Please contact us for more information on commercial concession agreements.

Author is Dmitry Biryukov

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