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June 13th, 2018

Legislative Newsletter - Edition 094

Brazil franchising contracts can change

According to data from Brazilian Franchising Association, Brazil is the 4th country in the world in number of franchising chain.

Legislative Newsletter - Edition 094

The franchising sector saw a turnover of approximately R$165 billion in Brazil between the 2nd Quarter of 2017 and the 1st Quarter of 2018. This represented a growth of 7% if compared to the previous period.  The sector was one of the few that presented growth even with economic crisis.

According to data from ABF (Brazilian Franchising Association), Brazil is the 4th country in the world in number of franchising chain, after China South Korea, and USA.  It is also 6th place regarding number of chain stores. Brazil also hosts the 2nd largest fair in the world specialized in Franchising.  Until 2016 138 chains already had their footprints overseas. In the same year 42% of cities already had franchised stores (2,321 cities).

In the country, although industries such as hospitality and entertainment started this type of business since 19th Century starting worldwide known brands, other industries such as food, fashion, health, and education are the ones with more share in franchising. 

In the US, corporate franchising is regulated by a policy from FTC[1] (Federal Trade Commission), valid nationwide, together with State laws, that protects Franchisees’ relationship with Franchisors.  The general rule[2] from FTC defines the franchising as a continuous commercial relationship with 3 elements:  Trademark, Significative Control or Assistance, and Fee payment of at least US$500 from the Franchisee to the Franchisor for the first 6 months.

Besides that, the FTC rule requires information of 23 points that deal with issues since the Franchisee identification to aspects related to protection of intellectual property.  More specifically:  Franchisee’s professional experience, litigation rules from the franchising model, estimated initial investment, Franchisee’s obligations, rules for renewal, termination, transfer, and disputes resolutions, restrictions applicable for Franchisee’s use, detailed description of the model.  These are some of the issues required by FDD (Franchise Disclosure Document), a denomination given to UFOC (Uniform Franchise Offering Circular) since 2007.This is a legal instrument supplied by the Franchisor to a prospective Franchisee at least 14 days prior to the contract signature of any formal contract or payment (in Brasil it is currently 10 days).

In Brazil franchising companies are regulated by Law 8.955/1994, that is based on UFOC – Circular de Oferta de Franquia (COF) from the US regarding the relationship between Franchisee and Franchisor.  In the US some States require that documents from Franchisee to be legally registered as a condition for selling.  In Brazil the COF can issue a document that is valid, so the legal registration is optional.  The COF document must be registered at INPI (National Institute of Industrial Property) so it can protect intellectual property elements, which is the condition for the Central Bank to authorize overseas shipment in international franchising cases with technology transfer involved.

Although investment in franchising is usually a safe investment with good chances of success, it is possible that investors choose a business without necessary information to lead the franchising to the growth stage expected. In view of this, the Senate has been discussing the House of Representatives Project Law 219/2015 that is based on Law 4386/2012.

The new regulation that is in discussion requires more details from the COF such as the exclusion employment or consumer relationship between franchisee and franchisor.  It also requires that the franchisee is named holder or authorized from the intellectual property holder negotiated in the franchising contract.  The Project law also proposes, among other measures, to increase from 12 to 24 months the period where franchisor can nominate dismissed franchisees.

At the same time COF go through changes, this measure can allow the use of franchising mechanism for Public companies.  Besides that, it can also authorize the use of arbitrary clause as means of conflict solution and regulate the use of sublocation when it is included in the franchising contract.  The Project law also includes the case of international contracts of franchising where there is the possibility of election clause from both parties.  It is important to note that the proposal is regarding only to the choice of jurisdiction and does not mention choice of applicable law.  In this case, the legislator believes that the franchising contract requires essentially[3], even if the measure does not discuss about the current law, we face a confusion between jurisdiction and applicable la.  These are distinct legal institutions that can be modified in the contract[4], even if the Project law refers to this possibility only for the jurisdiction.

Regarding the use of franchising companies for Public companies, the Project law seeks to adequate in what Law 8.666/1993 determines so they can make biddings to choose franchisees. The lack of adequation was key for drop the PL 3232/2012 that also discussed this subject.  Now the discussion is open in the Senate for a new opportunity to discuss the subject by Congress as well as by the market and society.

 

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[1] Disclosure Requirements and Prohibitions Concerning Franchising & Disclosure Requirements Concerning Business Opportunities - 16 CFR Parts 436 and 437

[2] Until the year of 2011 the subsequent american states count on especific rules in the subject: Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Mississipi, Nebraska, New Jersey, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin

 [3] Law of Introduction to Brazilian Law Standards

Art.9º. To qualify and govern the obligations, shall apply the law of the country in which they constitute.

  • 1º Aim at the obligation to be performed in Brazil and depending of essential form, this is observed, accepted the peculiarities of foreign law as extrinsic requirements of the act.

[4] Aim at the obligation to be performed in Brazil and depending of essential form, this is observed, accepted the peculiarities of foreign law as extrinsic requirements of the act.

  DOLINGER, Jacob. Direito Internacional Privado (Parte Geral). Rio de Janeiro: Renovar, 2011. pp. 330 e s.