Franchising: positive changes in legal regulation - International Law Office

Introduction
Franchise agreement registration and required scope of IP rights
Resale price maintenance and other limitations
Franchisor's liability for claims against a franchisee
Franchisee's rights after franchise agreement ends
Remuneration


Introduction

In November 2010 the Russian State Duma gave preliminary approval to a number of business-friendly amendments to the Civil Code regarding franchise agreements. These amendments, which will almost certainly become law, will align Russia more closely with the West with respect to franchise law and will simplify market entry for non-Russian companies intending to conduct franchise operations in Russia.

Franchise agreement registration and required scope of IP rights

At present, all franchise agreements in Russia must be registered with the Patent and Trademark Office (PTO) to be legally valid. A franchise agreement can be submitted for registration only after the underlying trademark has been registered in Russia. Even after the trademark has been registered, complying with the franchise agreement registration requirement is an onerous burden that entails a line-by-line review of the proposed agreement by the PTO, to check for compliance with mandatory provisions of Russian law. An agreement that is fully compliant can still take up to two months to be registered.

The amendments will permit franchise agreements to take effect without being registered, if franchise operations commence using a 'commercial designation' and not a trademark. While concluding such a franchise agreement, no trademark will need to be registered in Russia. Like a company name, a commercial designation is deemed to be intellectual property and identifies an enterprise; but unlike a company name, it does not require registration - it must merely be used. A commercial designation is lost if the owner fails to use it during any consecutive one-year period. On the other hand, an exclusive right to a commercial designation arises if the designation is distinctive and its use has become well known within Russia.

The amendments also set specific document processing deadlines for the PTO, requiring that registration or rejection of a franchise agreement occur within one month.

Resale price maintenance and other limitations

Current Russian law contains contradictory provisions regarding resale price maintenance. On one hand, competition law prohibits resale price maintenance provisions in any commercial agreements other than franchise agreements. Thus, competition law permits the franchisor to set minimum/maximum resale prices. On the other hand, the Civil Code provisions on franchising prohibit setting minimum/maximum resale prices, as well as limiting sales to a predefined group of customers or to certain customers located in a defined territory.

The amendments eliminate these conflicts by dropping the restrictions in the Civil Code and allowing the franchisor to impose such limitations.

Franchisor's liability for claims against a franchisee

A disadvantage of Russian franchise law in its current form is that, as a matter of statute law, a franchisor and franchisee are jointly and severally liable for defects in goods and services produced under the franchise agreement. The franchisor is secondarily liable for defects in goods provided to the franchisee pursuant to the franchise agreement, even if the franchisor has no direct control over the franchisee's actions.

The amendments eliminate joint and several liability and limit the franchisor's secondary liability in a way that that the franchisor will not be secondarily liable if the franchisor can prove that the claim, which is raised based on a bad quality of the franchised goods or services, is the result of the franchisee's default in performance.

Franchisee's rights after franchise agreement ends

Another major disadvantage of Russian franchise law has been that even after termination or expiration of a franchise agreement, the franchisor is severely restricted: as long as the franchisee duly performed its obligations while the franchise agreement was in effect, when the franchise relationship is over, the franchisee has a statutory right of first refusal to renew the agreement for a new term under the same terms and conditions. The franchisor's only alternative to renewal is to refrain from entering into a franchise agreement with another party for the same territory for three years.

The amendments ameliorate – but do not eliminate entirely – such restrictions. Under the amendments, a former franchisee will still enjoy a right of first refusal, but will no longer have the right to renew pursuant to the same terms; the franchisor will be able to change the renewal terms in accordance with current market demands. The likely reason for retaining the franchisee's right of first refusal in this amended form is the belief that many franchisees will have invested much time and effort in building up their businesses, and that as long as they performed as required during the initial term of the agreement, they should enjoy some measure of protection from being abandoned by the franchisor.

Remuneration

Under current law, the franchisor is permitted to receive remuneration from the franchisee as either a fixed lump payment or royalty payments, but not both. The amendments eliminate this restriction.

For further information on this topic please contact Natalya Babenkova at Noerr by telephone (+7 495 799 56 96), fax (+7 495 799 56 97) or email (natalya.babenkova@noerr.com).