CHINA FRANCHISE NEWS
Vol. 2 , No.7 - March 26, 2001
Special Edition:
A proposed revision of the "Administrative Regulations on Commercial Franchise Operation" ("Franchise Regulations") is before the State Economic and Trade Commission (SETC).
Lehman, Lee & Xu, as legal advisor to the China National Chain-store & Franchise Association (CCFA), has drafted a comment on the current Franchise Regulations. If you have any suggestions regarding our comment, please contact us at franchise@lalawfirm.com.cn
To see the electronic version of the Franchise Regulations, visit our web site www.Chinalaw.cc
TOPICS THIS ISSUE:
Comments on Franchise Regulations
- I. Applicability to foreigners
- II. Protection of trademarks and trade names
- III. Protection of imported technology
- IV. Franchise recordal
- V. The relationship between franchisor and sub-franchisee
- VI. Legal liabilities
- VII. Administrative agency
- Conclusion
Comments on Franchise Regulations
We understand that a proposed revision of the Administrative Regulations on Commercial Franchise Operation ("Franchise Regulations") has been taken under consideration by the State Economic and Trade Commission (SETC). Lehman, Lee & Xu (LLX), as legal advisors to the China National Chain-store & Franchise Association (CCFA), appreciate the opportunity to comment on the Franchise Regulations, as follows:
I. Applicability to foreigners
Article 3 provides that the Franchise Regulations apply to "enterprises, individuals, and other economic organizations which engage in commercial (including Food & Beverage and Service Industry) franchise business activities within the boundaries of the PRC". Some have interpreted this to open the field to participation by international franchisors and their affiliated FIEs. Practically, however, direct franchising by foreign franchisors to Chinese investors is not subject to the jurisdiction of the Franchise Regulations, but instead, to foreign trade laws and regulations. The lack of specific provisions governing foreign direct franchising not only makes foreign franchisors hesitant to invest in China, but also exposes Chinese franchisees to potential risks from franchisors' delinquency. Therefore, LLX recommends that foreign direct franchise arrangements be explicitly governed by the Franchise Regulations to comply with the WTO's national treatment principle.
II. Protection of trademarks and trade names
One particular concern to foreign franchisors is the protection of trademarks and trade names which will be licensed to Chinese franchisees.
After the franchisor terminates the franchise relationship with the franchisee and rescinds the license of trademarks and trade names under the franchise agreements, a problem may emerge: the franchisee might continue using the franchisor's proprietary trademark by registering the trademark as the trade name of its own business rendering similar services or manufacturing similar products. We here draw your attention to the Opinion regarding Solving Several Issues on Trademarks and Business Names published by State Administration of Industry and Commerce (SAIC) on April 5, 1999, which partly addresses the problem but has not been enforced well due to the division of responsibilities of different governmental authorities.
China has two separate systems for the registration of trademarks and trade names. Trademark registration with the China Trademark Office (TMO) is valid across the whole country. Trade name registration, however, is with different levels of business registry offices and applies only to the jurisdiction of the local registry office. TMO and business registry offices are two separate functions of AIC. Any dispute arising out of conflicts between trademark and trade name registrations is to be resolved by AICs at State and local levels.
In order to reduce conflicts between trademark and trade name registrations and to strengthen the protection of franchisors' intellectual property rights, it is suggested that, after the termination of the franchise relationship, the franchisee be prohibited from any further use of the trade name and trademark of the franchisor, or any registration of the franchisor's registered trademark as its own trade name in a similar business. The Franchise Regulations should appoint the SAIC to resolve such conflicts.
III. Protection of imported technology
Patents, know-how, marketing plans, systems, and management skills can all be licensed by a franchisor to its franchisees under franchise agreements. If the franchisor is a foreign company, the license contracts are collectively considered "technology import contracts" according to the PRC Administrative Regulations on Technology Import Contracts ("Technology Import Regulations") and its Implementation Rules. The Technology Import Regulations, however, put foreign franchisors (the licensors) in a difficult position by prohibiting restrictions on licensees from continuing to use the imported technology after the expiration of the technology import contract or from freely purchasing raw materials or equipment from different channels unless otherwise specially permitted by the examination and approval authorities (see Article 9 of the Technology Import Regulations). These provisions discriminate against foreign franchisors compared with domestic franchise enterprises and therefore discourage franchising in China.
If these issues cannot be addressed in the Technology Import Regulations, we hope they can be addressed in the revision of the Franchise Regulations.
IV. Franchise recordal
Article 17 of the Franchise Regulations sets forth a recordal obligation for all the franchisors before launching franchise activities in China. The recordal agency currently is CCFA. Following the provisions of Article 17, CCFA issued the Administration of Recordal of Franchise Enterprises Procedures ("Recordal Procedures") on January 26, 2000, indicating that franchise enterprises can apply for recordal voluntarily. LLX suggests that recordal of franchise enterprises be set forth as a compulsory obligation and enforced by CCFA to ensure the genuine identity and credit status of franchisors.
It is also recommended that the recordal documents itemized in Article 5 of the Records Procedures add the following: last two years' financial records, capital verification report, and warranty that no material litigation is pending.
V. The relationship between franchisor and sub-franchisee
Article 5 of the Franchise Regulations provides two forms for franchise operation: direct franchise and sub-franchise. According to the latter, the franchisor grants the master franchisee the exclusive right of franchise within a designated region. The master franchisee then has both the right to sub-franchise and the right to establish its own outlets in the region. However, the Franchise Regulations have no specific provisions on the relationship of franchisor and sub-franchisee. In practice, the lack of a direct contractual relationship restricts the franchisor's ability to supervise sub-franchisee's business operation. Both the franchisor and master franchisee have an important interest in enforcing the standards and quality of the franchised products or services. Therefore the law should give the franchisor the right to enforce such standards on sub-franchisees. To put it another way, the law should state that the franchisor stands in the shoes of the master franchisee with respect to enforcing the terms of the master franchisee's contracts with sub-franchisees.
VI. Legal liabilities
The current Franchise Regulations lack legal liability provisions. LLX suggests that administrative penalties be set forth in the Franchise Regulations to enforce the franchise agreements, to deter fraudulent acts, and to punish infringements of franchisors' intellectual property.
VII. Administrative agency
Administrative penalties should be enforced by an agency. LLX recommends that an administrative agency be created, perhaps within SAIC, to deal with infringement of franchise agreements. This specialized agency might include a mediation board or an arbitration board. The administrative agency should be subject to lawsuits filed by any aggrieved party who is dissatisfied with the decision or penalties made by the administrative agency.
Conclusion:
The above comments are limited to issues of primary concern to Lehman, Lee & Xu and our clients. We look forward to serving the Chinese government in its pursuit of improving and strengthening laws for the franchise business.
Lehman Lee & Xu
China Lawyers, Notaries, Patent, Copyright and Trademark Agents
Suite 188, Beijing International Club
21 Jianguomenwai Dajie, Beijing 100020 China
Tel.: (86)(10) 6532-3861
Fax: (86)(10) 6532-3877
mail@chinalaw.cc
http://www.chinalaw.cc/
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The China Franchise News is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.
