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Vol. 76 TMRFRANCHISING: A GLOBAL PHENOMENON

By Daniel Zendel*I. INTRODUCTION

Since the turn of the century, trademarks have played anincreasingly important role in the market place. Paralleling thisgrowth in the United States and abroad has been the developmentand expansion of franchising as a means of doing business andsupplying goods and services to the public. In a business contextWebster's New Collegiate Dictionary 1980 defines franchise as"the right or license granted to an individual or group to marketa company's goods or services in a particular territory." One mustadd to this definition the right to use the grantor's trademark,service mark, marketing plan or combination thereof in conjuctionwith the licensed goods or services.'

This article traces the history of the growth of franchising,highlights the characteristics of various franchising systems, andconsiders legislation and legal issues which bear on franchisingoperations in the United States and other countries. It is intendedas an introduction to a subject with which trademark attorneysare increasingly becoming involved.

H. HISTORY OF FRANCHISINGModern franchising in the United States has its roots in the

nineteenth century, in the form of government grants to publicutilities. It was not until the early part of this century, however,that franchising as a method of distributing goods and services(outside the scope of government grants) began to flourish. Thegrowth of franchising continued through the 1940s and mush-roomed in the post-World War II era.

* Partner in the firm of Ladas &Parry, New York, N.Y.; Associate Member of USTA;member of International Trademark Committee, USTA; Copyright @ 1986 Daniel Zendel.1. Section 681(3) of the New York General Business Law offers the following broaddefinition of franchise:

"Franchise" means a contract or agreement, either expressed or implied, whetheroral or written, between two or more persons by which:(a) A franchisee is granted the right to engage in the business of offering, selling,or distributing goods or services under a marketing plan or system prescribed insubstantial part by a franchisor, and the franchisee is required to pay, directly orindirectly, a franchise fee, or(b) A franchisee is granted the right to engage in the business of offering, selling,or distributing goods or services substantially associated with the franchisor's trade-mark, service mark, trade name, logotype, advertising, or other commercial symboldesignating the franchisor or its affiliate, and the franchisee is required to pay, directlyor indirectly, a franchise fee.

HeinOnline -- 76 Trademark Rep. 137 1986


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Vol. 76 TMRThe expansion and diversification of franchising in the post

war years was accelerated by the demands and opportunitiesbrought about by a booming economy. It provided an alternativemeans of supplying goods and services to the country which wasexperiencing enormous growth in population, income, and mar-keting opportunities. In addition, inexperienced former service-men with access to Veterans Administration insured loans2 andothers looked to franchise opportunities as a means to start theirown businesses. Throughout the 1950s and 1960s an abundanceof franchises emerged dealing with a variety of goods and services,including restaurants, fast foods and grocery stores, gasoline ser-vice stations, automobile dealerships, and motel and hotel chains.With the proliferation of franchises in the United States cameinevitable problems and abuses. Many franchises failed, often dueto misrepresentations or other unfair practices of franchisors. Con-sequently, the early 1970s were difficult years for franchising inthe United States. The public had begun to become aware of manyanticompetitive and unfair franchising practices. Public awarenessand adverse reaction, coupled with general economic stagnationduring this period, resulted in the economic collapse of hundredsof franchisors, including reputable as well as disreputable com-panies, who were unable to sell franchises. The collapse of thosefranchisors left thousands of franchisees decimated. By the late1970s, however, franchising had substantially changed for the bet-ter and the financial crisis was over

Today the franchise system has been applied to a broad rangeof businesses, such as accounting and tax services, domestic ser-vices, automotive products, parts, and rentals, dance studios, fastfoods, health clubs, garden care services, and pest control, to men-tion but a few. In the United States, franchising accounts for wellin excess of thirty percent of all United States retail sales. Salesof franchise goods and services were expected to approach four-hundred fifty-seven billion dollars in 1984.' United States govern-ment statistics indicate that the success rate of American busi-nesses owned by franchisees is much higher than the rate for otherindependently owned small businesses, and a very high percentageof franchise contracts due to expire are renewed, reflecting themutually beneficial aspects of modern franchising.The success of franchising in the United States has led to theemergence of franchising overseas. American companies have led

2. Harry Kursh, The Franchising Boom, How You Can Profit In It, at 4 (1962).3. Harold Brown, Franchising Realities and Remedies, at 1-3 to 1-4 (1982).4. Franchising in the Economy 1982-1984, US Department of Commerce.



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Vol. 76 TMRthe way with expansion to markets in virtually every region ofthe world. The Coca-Cola Company bottling franchises have madethat soft drink brand perhaps the most recognized trademark inthe world, and McDonald's fast food outlets can be found on thefashionable streets of many foreign capitals, including Paris, Lon-don, and Tokyo. Conversely, foreign based franchises are expand-ing to the United States at an increasing rate. The restrictionsplaced on foreign investors wishing to operate businesses in theUnited States are relatively few. Foreign investors are generallytreated on an equal footing with domestic investors, except incertain critical industries, such as banking, real estate, shipping,aviation, and communications. The United States governmentdoes, as a matter of policy, encourage and support small businesses.Furthermore, the United States Labor and Commerce Deparmentshave looked to franchising as a means of helping minority groupsto enter the mainstream of American business. There is, however,no particular governmental attitude towards franchising in gen-eral, or more specifically franchising by foreigners in the UnitedStates,' except the concern to prevent unfair practices as expressedin legislation, government regulations, and court decisions.

III. CHARACTERISTICS OF FRANCHISESFranchising can provide both the franchisor and franchisee

with significant business and financial benefits. Proprietor inex-perience and lack of sufficient capital are two primary reasons forbusiness failure. Franchisors who furnish start up and operationalguidance and training, as well as needed capital, help to offset thefranchisee's lack of experience and financial resources. Addition-ally, franchisees enjoy the benefits of using the franchisor's trade-marks and service marks with their attendant good will andregional or national reputations. Franchisees also derive substan-tial benefits from marketing and operating plans and joint adver-tising programs of the franchisor. In many instances franchiseesare able to arrange for financing of a portion of their investmentin a franchised business, often with the aid of the franchisor.6Franchising also provides the franchisor with significant ad-vantages. Franchisees furnish the human and frequently much ofthe capital resources needed for the growth and success of a fran-chising system. They provide funds for advertising and construct

5. Philip Zeidman, Foreign Laws Affecting Franchise Operations: United States, inSurvey of Foreign Laws and Regulations Affecting International Franchising, at 1 (1982).6. Lewis Rudnick, An Introduction to Franchising, in International Franchising-AnOverview, at 8-10 (1984).



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Vol. 76 TMRand maintain facilities. Franchisees also purchase inventory andremit payments to franchisors in the form of franchise fees androyalties. Another significant benefit of franchising to the fran-chisor is the participation of local, highly motivated managers,with knowledge of local customer needs, who are committed totheir businesses because of their ownership interest. Furthermore,franchisees frequently provide innovations, information and meth-ods which benefit the entire franchise system.A key ingredient in the success of a franchise system is theimplementation and enforcement of uniform standards, operatingprocedures and controls to insure consistency and quality through-out the system. The controls do, however, lessen the degree of thefranchisee's independence and place restrictions on the way afranchisee can operate his business.' The franchisee is often forcedto abide by restrictive clauses (such as territorial restrictions) in-cluded in the franchise agreement which inhibit or preclude busi-ness expansion. The franchisee may also be required to pay forcertain services which the franchisee considers to be of question-able value in the operation of the franchise. Furthermore, thefranchisee in a dual distribution system, in which some outletsare owned by the franchisor and others are owned by franchisees,may be at a distinct competitive disadvantage with its franchisorif the franchisor should decide to sell its products at reduced priceswhich it alone can afford. On the other hand, the franchisor mustbe concerned with government regulation of franchising, lawsuitsbrought by disgruntled franchisees, noncompliance by franchiseeswith the terms of the franchising arrangement, franchisees leavingthe system and starting up competing businesses, and tax, as wellas insurance considerations.Franchises have developed in a variety of forms in the UnitedStates, depending upon the nature of the goods or services offered.The business format franchise, exemplified by fast food restau-rants, has become quite prevalent. The franchisor provides itsfranchisees with a uniform identity, in the form of its trademarksand service marks, trade dress and advertising, as well as standardoperating plans and procedures. The business format franchisorfrequently provides equipment, raw materials, and supplies, andsometimes finished products. The franchisees in turn perform ser-vices and in some cases sell products relating to the services,materials, and products provided by the franchisor. Product ordistributorship franchises, which in some cases are quite similar

7. Id at 10.



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Vol. 76 TMRto business format franchises, are distribution outlets for goodsproduced by the franchisor. Automobile dealerships and gasolinestations can be placed in this grouping. A limited number of fran-chised dealers are selected. They are given exclusive territoriesand generally are bound to offer for sale only the franchisor'sproducts. Typical product franchisees identify closely with thefranchisor's trademark or trademarks and will often service theproducts they sell.8

Manufacturing license franchising, such as soft drink bottlingfranchises, typically involves the manufacture by a licensee of aproduct that is produced by use of a patent, formula or know howsupplied by the franchisor and sold under the franchisor's trade-mark. In the soft drink industry, for example, the trade secretsyrup is supplied to the licensed bottlers who produce the finishedsoft drink and sell it under the franchisor's trademark. Affiliationfranchises are comprised of independent established businesses inthe same field who are joined together in a franchise to gain theadvantages of using the franchisor's well-known trademarks andservice marks, advertising, purchasing and other services. Thisform of franchising began with real estate broker franchise ar-rangements in the 1970s.'

IV. LEGISLATION AND LEGAL ISSUESA. United States

1.LegislationAs franchising has grown, so too has the enactment of lawsdesigned to regulate franchising and to prevent abuses and unfair

practices. Since 1970, when California enacted the first statutedealing with franchise sales,1" franchise disclosure and registrationlaws have come into force in more than a dozen states. A numberof states have pre-sale disclosure requirements, but do not requireregistration, and several states have enacted laws dealing withcertain aspects of the franchising relationship, such as terminationand renewal of franchises, requiring good cause for terminationand non-renewal. There are also federal statutes applicable to twospecific industries and more generally applicable federal regula-tions adopted by the Federal Trade Commission (FTC).

8. Id at 27-29.9. Id at 29-30.10. Cal Corp Code 31000 et seq.



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Vol. 76 TMRThe Uniform Franchise Offering Circular (UFOC), developedlargely through the efforts of the Midwest Securities Commission-

ers Associations, has been adopted as the basic disclosure documentin the vast majority of states which have enacted legislation re-quiring franchisors to disclose to prospective franchisees certaindetails about themselves as well as the franchise being offered. Afew states, however, such as Michigan and New York, have gonebeyond the requirements of the UFOC.

New York, which has perhaps the toughest and most com-prehensive franchise law, has imposed detailed and stringent re-quirements regarding the establishment and maintenance offranchises within the state. New York's Franchise Sales Act,"effective January 1, 1981, requires that a franchisor's prospectusbe submitted for evaluation, approval and registration by the De-partment of Law, along with a copy of the franchise contract.Large franchisors, however, are exempt from the registration re-quirement. Before any franchise may be offered or sold in NewYork State, the prospective franchisee must first be provided witha copy of the approved offering prospectus, and copies of all fran-chise and related agreements and annexations at the earlier of:(a) the first meeting between the franchisor (or its agent) and theprospective franchisee; (b) ten business days prior to the executionof any franchise or other agreement; or (c) at least ten days priorto the receipt of any consideration in connection with the offer orsale of a franchise. These requirements provide a prospective fran-chisee with adequate time to examine and evaluate all the termsof the intended franchise arrangement with expert counsel beforea commitment to the franchise is made.

While large franchisors are exempt from the registration pro-visions (and only the registration provisions) of the New York Act,those franchisors not exempt are required to submit detailed pro-spectuses (written disclosure statements) to the Department ofLaw. New York recognizes the Uniform Franchise Offering Cir-cular (UFOC) and the FTC format prospectus. The stringent NewYork Act also sets forth a long list of items of information whichmust be included in the offering prospectus submitted for regis-tration. These requirements include, for example, information re-garding the franchisor's business and financial history, businessexperience, possible criminal convictions, the franchise fee andother payments or fees required of the franchisee, termination andrenewal provisions, required supply and purchasing provisions,

11. NY Gen Bus Law 680 et seq.



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Vol. 76 TMR

limitations as to goods or services which may be sold, financingarrangments (if any), and a representation that the prospectusdoes not knowingly omit any material fact or contain any untruestatement of a material fact. Franchise sales agents must also beregistered with the Department of Law, unless the franchisor isexempt, in the case of large franchisors.The New York Act goes well beyond the disclosure and reg-istration requirements considered above. It provides for post fran-chise sale monitoring and gives the Department of Law broadpowers to conduct investigations relating to franchise sales fraud.In some cases the Law Department may order the escrow or im-poundment of franchise fees. The Attorney General may institutecivil proceedings on behalf of victims of franchising fraud andprosecute those persons who knowingly violate that Act. Violationsof the New York Act are Class A misdemeanors.There are two federal statutes which regulate franchise re-lationships in specific industries. The Automobile Dealers' Day inCourt Act"2 requires franchisors to act in good faith and was de-signed to prevent coercive and unfair practices by manufacturersagainst automobile dealers. It includes provisions concerning ter-mination and non-renewal. For the most part, however, this acthas not proven to be effective. The Petroleum Marketing PracticesAct,'" which preempted more stringent state statutes designed toprotect gasoline service station dealers, involves regulation of ter-mination and non-renewal of franchise arrangements employedin this industry.The only federal regulation which deals generally with thesubject of franchising (not limited to a particular industry) is theFederal Trade Commission regulation entitled Disclosure Require-ments and Prohibitions Concerning Franchising and Business Op-portunity Ventures 4 or the Franchise Rule, which becameeffective in October 1979. The Franchise Rule, like the state fran-chise disclosure statutes, requires pre-sale disclosure of specifiedinformation to potential franchisees. Under the FTC format anddisclosure requirements, the franchisor is obliged to set forth thebusiness experience of the franchisor and its directors and officers,including their experience in franchise type businesses. Criminalconvictions and civil liabilities involving fraud or restraint of tradepertaining to the franchisor and/or its principals, must also bedivulged. The terms of the franchise must be set forth in detail,

12. 15 USC 1221-25.13. 15 USC 2801-06.14. 16 CFR 436.



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Vol. 76 TMRincluding the obligations, duties, and limitations imposed upon thefranchisee. These include, for example, the various fees and fundsto be paid by the franchisee to the franchisor or an affiliatedperson, restrictions as to the territory, customers and goods and/or services, and terms relating to duration, renewal, and assign-ment of rights. The FTC Rule does not, however, provide for fran-chise registration, and furthermore, it does not prohibit deceptivepractices by franchisors after the sale of franchises, that is whilethe franchises are in effect."6 It is therefore significant that thefederal Franchise Rule does not preempt state legislation, exceptwhen the federal Rule is more stringent or comprehensive thanstate disclosure requirements, and in a few other areas.In addition to the two federal statutes relating to franchisingconsidered previously, the federal statutes governing trademarklaw, the Lanham Act 6 and antitrust law, the Sherman,' 7 Clayton,"and Robinson-Patman Acts'9 all have a significant impact on thefranchise relationship. Certain sections of the Federal Trade Com-mission Act,2' dealing with deceptive practices and unfair com-petition also have application to franchising, as do certainprovisions of federal and state securities laws.2. Legal Issues

Various aspects of typical franchise agreements are subjectto scrutiny under federal and state antitrust laws. Franchise con-tracts are inherently restrictive, and whether certain provisionsare deemed to be unlawful restraints of trade, is often a questionof fact. In vertical distribution systems such as franchising, withthe exception of price fixing, the per se rule relating to violationof the antitrust laws has given way to the rule of reason. Conti-nental T.V., Inc. v. GTE Sylvania Inc." (which concerned terri-torial and customer restrictions) is the landmark case whichsolidified the rule of reason doctrine. In the dictum, the SupremeCourt established that, except for price fixing, all vertical re-straints shall be evaluated under the rule of reason until suchtime as the courts develop new per se rules pertaining to specificpractices. The evolution from rule of reason, to per se violations,and back to rule of reason is extremely important, since per se

15. Supra note 3 at 6-28.16. Section 1 et seq, 15 USC 1051 et seq.17. 15 USC 1.18. 15 USC 21.19. 15 USC 13(c).20 . 15 USC 41-58.21. 433 US 36 , 53 LE 2 568, 97 Sup Ct 2549 (1977).



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Vol. 76 TMRkept in mind, however, that the facts of these two cases are con-siderably different.

A crucial issue in cases where the franchisor's trademark isalleged to be a separate product, is the interrelationship of thetrademark and the actual product supplied to the franchisee, asperceived by the purchasing public. To put it another way, are thetrademark and the product so closely identified together and in-terconnected as to be inseparable, or can the two exist indepen-dently and therefore be considered as separate entities or productsin the minds of the purchasing public? If the answer is that themark and product are inseparable an illegal tie-in will not befound. A clear cut example where this issue was pivotal is PowerTest Petroleum Distributors, Inc. v. Calcu Gas, Inc.,' decided bythe Second Circuit Court of Appeals. Power Test sued its franchiseddealer for trademark infringement when it learned that the de-fendant was selling non-POWER TEST brand gasoline in violationof the franchise agreement. Both the district court and the courtof appeals rejected the defendant's assertion that the defendant'sbeing forced to purchase POWER TEST gasoline as a condition tobeing able to use the POWER TEST trademark consitutes anillegal tie-in, even though the plaintiff did not manufacture thegasoline products. Both courts determined that the trademarkPOWER TEST and the gasoline were inseparable, and not separateitems or products in the minds of the purchasing public. Theappeals court noted that it is precisely the gasoline products whichthe consumer associates with the trademark POWER TEST. Thecourt determined that the fact that Power Test does not manu-facture the gasoline products in question, but merely purchasesthem, does not call for a different ruling; since Power Test doesanalyze the gasoline products which they purchase to make certainthey conform with standards and specifications set by them. Fur-thermore, Power Test puts its name and reputation behind thegasoline which it presents and offers to the purchasing public andthat is what is relevant, not who actually manufactures the prod-ucts. Accordingly, it was held that an illegal tying agreement didnot exist and the plaintiff was awarded injunctive relief. This casefollowed analogous cases with similar findings."

Franchise agreements typically contain several broadlyworded covenants not to compete, which prohibit franchisees fromassociation with any business similar to the franchisor's during

25. 754 F2d 91, 225 USPQ 368 (C A 2 1985).26. See Chicken Delight, supra note 23 , and Krehl v. Baskin-Robbins Ice Cream Co.,664 F2d 1348 (CA 9 1982).



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Vol. 76 TMRthe term of the franchise agreement. These "in-term" restrictionsoften have no geographic limitation. The agreements also com-monly contain "post-term" restrictions which prohibit franchiseesfrom engaging in a similar business within a certain geographicarea for a specific length of time after the franchise relationshiphas terminated. Third, franchise agreements commonly prohibitfranchisees from utilizing in other businesses confidential infor-mation obtained from the franchisor, with usually no time orgeographic limitations. The validity of restrictive covenants infranchise agreements is evaluated by "rule of reason" analysis.American courts consider various factors using this approach, in-cluding whether the restriction relates to the legitimate businesspurposes of the party imposing the restriction, whether its scopeis limited to protect these interests, whether the restriction isreasonably limited in both time and geographic area, and whetherthe restriction is consistent with public policy considerations. Infranchise agreements, the restrictive covenants should be judgedby their cumulative effect in determining their reasonableness.27Although restrictive covenants can be considered contracts underthe Sherman Act, with clearly anti-competitive effects, with fewexceptions, the federal antitrust laws have not been applied torestrictive covenants.' One case involving an "in-term" compe-tition restriction, which did encompass restraints under the Sher-man Act, is American Motor Inns, Inc. v. Holiday Inns, Inc.'

An interesting aspect of franchising is the extent franchisorsare legally responsible for the conduct of their franchisees. Severaltheories of liability have been cited by courts in a number of casesin recent years where the question of franchisor liability hasarisen. The law of agency has been applied in determining whetheran actual master-servant relationship exists between the franchi-sor and franchisee, or if an apparent agency exists. An agencyfinding would result in a franchisor being vicariously liable forthe franchisee's wrongdoings. A second theory of liability stemsfrom the franchisee's use of the franchisor's trademark." As aresult of increased potential liability resulting from claims againstfranchisees' business operations, franchisors have required fran-chisees to carry adequate insurance to indemnify franchisors

27. Philip Evans and Lanny Streeter, The Franchise Agreement and Covenants Notto Compete: Antitrust Implications, 25 IDEA 9, 9-14 (1984).28. Id at 17-18.29 . 521 F2d 1230 (CA 3 1975).30 . William M. Borchard and David W. Ehrlich, Franchisor Tort Liability: Minimizingthe Potential Liability of a Franchisor for a Franchisee's Torts, 69 TMR 109 (1979).



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Vol. 76 TMRagainst damages. Franchisors also frequently carry their own in-surance to guard against vicarious liability claims.

B. Outside the United StatesDespite the emergence of franchising in many areas of the

world, there has been only scattered legislation and governmentalinvolvement in franchising regulation outside the United States.Of the major industrialized nations, only Canada, Australia, andJapan currently have laws or regulations which specifically relateto franchising; although many others have laws and practiceswhich do have a significant impact on franchising arrangements.For example, a number of countries, including Australia, Canada,New Zealand, and the United Kingdom, have laws which deal with"pyramid" selling schemes, which can affect certain types of fran-chises. Others have statutes and regulations dealing with aspectsof franchise agreements. For example, laws have been enacted invarious countries to protect dealers and distributors against ar-bitrary cancellation or non-renewal of their distribution rights.The competition and technology transfer laws in place in manyindividual countries, as well as the European Economic Commu-nity and the Andean Pact, also impact on franchising, as do theexchange control regulations regarding foreign capital and pay-ment of royalties to foreigners.

1. CanadaCanada, America's biggest trading partner, has been greatly

affected by the growth of franchising in the United States. Despiteits important role in the Canadian economy, the federal govern-ment has not enacted any legislation which specifically deals withthe subject. On the provincial level, only Alberta has a law reg-ulating franchising"' which is comparable to the franchising stat-utes in effect in several American states. For example, the Albertalaw has detailed disclosure and registration requirements.

On the federal level, Canada's antitrust statute, the CombinesInvestigation Act'2-while not specifically aimed at franchising-does address many restrictive practices commonly found in fran-chise agreements. Such practices as "exclusive dealing," "tied sell-ing," and "market restrictions" are defined, and considered to be"reviewable trade practices." The provisions of the Act are carriedout on an administrative level by the Director of Investigation and

31. The Franchises Act, S.A., Ch 38 (1971), as amended 1983.32. RSC c Ch-23 (1970).



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Vol. 76 TMRResearch, who (as the title suggests) is empowered to investigatecomplaints of alleged violations of the Act. The results of suchinvestigations are turned over to the Restrictive Trade PracticesCommission for review and issuance of orders in connection withthe alleged violations. The Act provides for both civil damages andcriminal penalties. Appeals from the Commission's orders to theCanadian Federal Court are available. A non-Canadian franchisorwho intends to establish franchises in Canada should take intoaccount the provisions of the Investment Canada Act of 1985.'

The securities laws of the various Canadian provinces, par-ticularly that of Quebec' (which specifically deals with franchis-ing, although its provisions are not yet in force) and the TradeMarks Act' should also be considered by non-Canadian franchisorswishing to expand their operations to Canada.

2. AustraliaAustralia has no laws which specifically relate to franchising

in general terms. Australia, however, does have a federal lawregulating franchises that involves the sale of motor fuels,' whichin some respects resembles the United States Petroleum Market-ing Practices Act. The Australian Act requires the disclosure ofcertain information relating to the business operations, and hasprovisions relating to termination and renewal of the franchises.

The antitrust laws3" of Australia address horizontal and ver-tical restrictive practices in a fashion not dissimilar to the waysuch practices are treated under American antitrust law. Theeffects such restrictive practices have on competition in the rel-evant Australian market are taken into account. While there area number of laws which regulate foreign exchange and invest-ment," the Australian government generally views foreign in-vestment in favorable terms so long as it is consistent with theneeds of the country. 9

3. Japan and Other Far East CountriesThe enormous growth in the Japanese economy following

World War II has brought about a change in government policy.33. SC c 20 (1985).34 . Securities Act, RSQ c v-1 (1977), amended SQ c 79 (1979).35. RSC Ch T-10 (1970).36. Petroleum Retail Marketing Franchise Act (Commonwealth [hereinafter cited asC'th] 1980).37. Trade Practices Act (C'th 1974).38. See, for example Foreign Takeovers Act (C'th 1980).39 . R.E. Ricker and D.R. Shannon, Foreign Laws Affecting Franchise Operations:Australia, in Survey of Foreign Laws and Regulations Affecting International Franchising,at 1 (1982).



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Vol. 76 TMRThe restrictions to foreign investment have been gradually lifted,and today few if any substantial restrictions remain. Foreigninvestors, however, are required to conform to the governmentreporting requirements of the Foreign Exchange and ForeignTrade Control Law.41 Foreign investment proposals are reviewedby the Finance Ministry (along with other relevant ministries),which is empowered to issue recommendations or orders in con-nection therewith. Franchise agreements between non-residentfranchisors and resident franchisees are considered to be technicalassistance agreements, and as such are subject to the same re-porting requirements as foreign investments.Franchise agreements must be submitted to the Japanese FairTrade Commission (JFTC), for review in relation to the Japaneseantimonopoly laws.42 Restrictive trade practices such as tie-ins,exclusive dealings, and territorial and customer restrictions aresubject to scrutinization under the antimonopoly laws and by theJapanese courts in a manner comparable to treatment of suchpractices in the United States. The JFTC has issued a report'concerning franchising in the context of the competition laws,which sets forth the various factors which the JFTC will considerin evaluating franchise arrangements. It is significant that theJFTC considers it necessary that the franchisor disclose certaininformation to the prospective franchisees, such as fees and roy-alties, training requirements, termination and renewal conditionsand (unlike many United States disclosure statutes) sales andearnings forecasts. The Japanese study included a review of UnitedStates practices and laws relating to franchising."The Law Concerning Development of Middle and Small ScaleRetailers,45 which was created to assist and provide preferentialtreatment to smaller retail stores, can benefit Japanese franchi-sees and their foreign franchisors. A franchisor applying to qualifyunder the law is required to disclose certain information to itsprospective franchisees, such as initial and ongoing fees to be paidby the franchisees, renewal and termination terms, and conditionsrelating to the sales of goods.4

40 . Toshira Nishimura, Foreign Laws Affecting Franchise Operations: Japan, in Sur-vey of Foreign Laws and Regulations Affecting International Franchising, at 1 (1982).41. Law No 228 (1949), as amended.42 . Act Concerning Prohibition of Private Monopoly and Maintenance of Fair Trade,Law No 54 (1947), as amended and Fair Trade Commission Notification No 11 (1953).43 . Comments on the Antimonopoly Law in Relation to the Franchise Systems, Officeof the Fair Trade Commission (1983).44. Philip Zeidman, Regulation of Franchising in the United States: Implications ForIndustrial Franchising, in International Franchising-An Overview, at 137-38 (1984).45 . Law No 101 (1973), as amended.46 . Supra note 41 at 7-8.



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Vol. 76 TMRThe other countries of the Far East, including both the de-

veloping and developed countries, are all interested in expansionand economic growth. Franchising can play an important role inthe economic growth of the Far East because of its rapid growthpotential. Foreign investment, however, is subject to regulationand review in practically all the countries of the region. For fran-chising to be accepted and flourish it must be demonstrated thatthe businesses most often associated with franchises will be ben-eficial to the economic development of the countries concerned.The task of demonstrating the economic benefits of franchise busi-nesses is not easy since these enterprises generally must take aback seat to sophisticated technology licensing opportunities,which are needed to produce essential capital and consumer goodsfor both domestic consumption and export.47

This attitude has until now prevailed in Taiwan. Althoughforeign investment has played a significant role in the phenomenaleconomic growth and prosperity of this country," not all forms offoreign investment receive favorable treatment. The emphasis hasbeen to attract foreign investment in high technology areas, whereincentives and repatriation of capital are available, and approvalfrom the Investment Commission of the Economic Affairs Ministryis most likely. On the other hand, the expertise provided by fran-chise operations is primarily of a marketing nature with little orno high technology application. For now at least, franchising isnot much of a factor in Taiwan despite its great market potential.

4. United KingdomFranchising has been firmly established in the economy ofthe United Kingdom, where American franchising companies in

particular are prominent in, for example, the fast food and au-tomobile rental industries. The government generally favors for-eign investment and there are comparatively few restrictions orrequirements which would inhibit foreign franchisors from oper-ating in the United Kingdom. For example, there are no exchangecontrol regulations in force at the present time. There is no lawwhich specifically deals with franchising, although there are leg-islative prohibitions against pyramid schemes which could affect

47 . See David Shannon, Focus on Franchising in the Asia/Pacific Region, Joint Ven-tures, Regulation of Investment, Tax, in International Franchising-An Overview, at 250-54 (1984).48. In 1981, for example, exports by foreign invested businesses totaled almost $5.7billion. See M.S. Lin and Michael Hickman, Legal Aspects of Doing Business in Taiwan,at 31 and 55 (1984).



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Vol. 76 TMRarea franchising arrangements.49 The franchising relationship isgoverned by contract and commercial law.

As in many other countries, the antitrust laws' of the UnitedKingdom affect franchising, because of its inherently restrictivequalities, although the effects are less far reaching than in theUnited States. Under the provisions of the Restrictive Trade Prac-tices Act, franchising agreements with certain provisions (for ex-ample price fixing, territorial and customer restrictions, andexclusive territorial grants) must be registered with the DirectorGeneral of Fair Trading, and are presumed to be contrary to thepublic interest. Unless the presumptions are overcome at the Re-strictive Practices Court, the agreement can be declared void withrespect to the objectionable provisions. By virtue of the Compe-tition Act, the Director General of Fair Trading has the respon-sibility for investigating allegedly anti-competitive trade practices.The results of the investigations are evaluated by the Monopoliesand Mergers Commission which decides if the practices are againstthe public interest. Thereafter, orders can be issued by the Sec-retary of State for Trade prohibiting the offensive practices inquestion. Restrictions such as tying arrangements, commonlyfound in franchise agreements, are among the practices whichwould be judged as anti-competitive." The Resale Prices Act 1976prohibits resale price maintenance. The Restrictive PracticesCourt, however, is empowered to exempt certain classes of goodson application by the supplier of goods. In addition to the nationalantitrust laws and regulations, a foreign franchisor operating inthe United Kingdom is subject to the competition provisions ofthe Treaty of Rome, Articles 85 and 86.

5. FranceIn comparison with the United States or the United Kingdom,the attitude of the French government towards foreign investment

has been more guarded and restrictive. Foreign investments whichare likely to bring employment and needed capital to France arewelcome, provided they do not compete with French interests inthe same areas of business. If there are local competing interests,the foreign investor is likely to be discouraged and sometimes evenprevented from investing in France. Furthermore, there are strictexchange control regulations in effect in France.

49 . Fair Trading Act, Part XI (1973).50. Restrictive Trade Practices Act (1976); Competition Act (1980).51. Martin Mendelsohn, Foreign Laws Affecting Franchise Operations: United King-dom, in Survey of Foreign Laws and Regulations Affecting International Franchising, 1at 7-10 (1982).



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France in connection with a variety of goods and services, theFrench government seems to have taken a "wait and see" attitudewith regard to regulation up until fairly recently. Commissionshave been established to study franchising and its effects, andthere have been proposals for legislation; however, thus far nolegislation has been enacted. Accordingly, franchise agreementsare governed by the laws relating to commercial contracts. Forexample, sections of the Civil Code address certain provisions com-mon to franchise agreements, such as termination and non-re-newal. In the absence of specific franchising legislation, the FrenchFederation of Franchising has formulated a Code of Business Eth-ics for franchising, which contains certain rules applicable to fran-chisors and franchisees, and which are meant to be binding uponall the members.

Foreign franchisors should be certain that their trademarksand service marks are registered with the National Institute ofIndustrial Property (INPI). Foreign franchisors granting industrialproperty rights (for example, trademark licenses) to their Frenchfranchisees must register the agreements with INPI. If the fran-chisor operates through a French master franchisee, each of theagreements with the subfranchisees must also be registered withINPI, along with the master franchise agreement.2

The antitrust laws5" of France, as well as the competitionregulations in effect in the EEC, may impact on restrictive tradepractices commonly included in franchise agreements. Personsviolating the price fixing and antitrust laws of France are subjectto civil and criminal liability.

6. Federal Republic of GermanyWest Germany has benefited greatly from international trade

since its reconstruction after the end ofWorld War II. Accordingly,the German government has been a strong advocate for the freetraffic of goods and investments among countries. Foreign invest-ment is thus encouraged in Germany, and this attitude is reflectedin the fact there is little if any discrimination against foreigninvestment in Germany and with the exception of notificationrequirements, there are no exchange control regulations in force.'

52 . Oliver Gast, Franchising in Europe: France, in International Franchising-AnOverview, at 385 (1984).53 . See, for example, Ordinance No 1483, Article 37 (1945) with regard to unlawfulprice fixing and Law No 77-806 (1977) concerning agreements which prevent or distortcompetition.54 . Christoph Von Teichman, Legal Aspects of Doing Business in Europe-FederalRepublic of Germany, at 205 (1983).



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Vol. 76 TMRSeveral popular and alternate methods of distributing goods

are available to foreigners in West Germany. Commercial agents,who are independent businessmen, represent merchants and gen-erate business on behalf of the merchants. German dealers ordistributors, on the other hand, trade in their own name andresemble product franchisees common in the United States, al-though German dealers generally operate with more independenceand with fewer restrictions. Furthermore, these dealers, unlikemany franchisees, generally already possess the necessary tech-nical and commercial expertise upon entering into the dealershiparrangement.5

In recent years franchising, as an alternative system for dis-tributing goods and services, has become much more evident inGermany. While there are no specific laws governing franchising,franchise agreements are regulated by contract provisions of thecivil law. Franchising arrangements are also affected by the pro-visions of the Cartel Law, which deals with typical restrictivepractices such as territorial and customer restrictions, tying ar-rangements and exclusive dealings requirements. The Cartel Au-thority is empowered to declare certain practices to be invalid andunenforceable "abuses." In Germany, as in other countries of theEEC, the competition provisions of the Treaty of Rome are appli-cable.

7. European Economic Community (Common Market)Without analyzing in detail the impact which EEC competi-tion laws may have on franchising within the European Com-

munity, a few general points should be raised. The principalsections of the Treaty of Rome to be considered are Articles 85(1),85(3) and 86. Article 85(1) prohibits agreements and concertedpractices which may affect trade between the member states andwhich have as their object or effect the prevention, restriction ordistortion of competition within the Common Market. Article 85(1)lists particular restrictive practices which may be unlawful. Ar-ticle 85(1) is not, however, applicable to franchise and other formsof distribution arrangements which do not affect trade betweenthe member states to a significant extent.

Article 85(3) provides for exemptions from the proscriptionsof Article 85(1) where certain conditions exist, and Article 86 pro-hibits abuses of a dominant position within the Common Market.The European Commission is empowered to institute ex officio

55. Walther Skaupy, Franchising in Europe: Germany, in International Franchising-An Overview, at 393-94 (1984).



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Vol. 76 TMRproceedings for violations of Articles 85(1) and 86 , and may grantexemptions under Article 85(3). Applications to the Commissionfor violations of the competition laws may be filed by memberstates or by any persons with legitimate interests in the proceed-ings. Decisions of the Commission are subject to review by theEuropean Court of Justice. In order to avoid the possibility ofreceiving heavy fines, parties often choose to notify their agree-ments to the European Commission, seeking negative clearance(a ruling that the agreement does not fall within prohibitions ofArticles 85(1) and 86) or exemption under Article 85(3) or both.The usual restrictive practices (which may be found in franchiseagreements), such as exclusive dealings and tying arrangementsand territorial and customer restrictions, are regulated and insome cases, such as resale price maintenance, are expressly for-bidden. The Commission has in recent years enacted importantregulations dealing with exclusive distribution agreements, suchas regulations provding for block exemption for certain exclusivedealing arrangements. With the proliferation of franchising inEurope, one can expect the Commission to consider new regula-tions dealing with distribution and service franchises, possiblyblock exemptions.Many sections of the Treaty of Rome affect intellectual prop-erty rights of franchisors. These should be considered togetherwith the competition provisions and various regulations and de-cisions of the European Commission and the European Court ofJustice,' in the context of franchise agreements and the exerciseof intellectual property rights by franchisors and franchisees. Par-ties to franchise agreements should also keep in mind that thefree movement of goods within the Common Market is a basictenet of the Treaty, which objective is fostered and promoted byEEC competition law.

8. Latin AmericaWhile there are no laws in the Latin American countries

which specifically deal with franchising, the foreign investmentand transfer of technology laws in these countries greatly affectfranchising. The Andean Pact, established in 1969 with the signing

56. See Pronuptia de Paris GmbH, Frankfurt v. Firma Pronuptia de Paris IrmgardSchillgalis, Hamburg, Case 161/84, Common Market Reports, 10,760, pp 11747-48 (Feb-ruary 13, 1986), Financial Times, Cols 1-4, p 39 in which for the first time the EuropeanCourt held that the competition laws of the Treaty of Rome are applicable to franchiseagreements affecting trade among the member states. While the Court upheld a numberof clauses which it felt were necessary to preserve the identity and reputation of thefranchise system, it found that clauses imposing territorial restrictions constituted marketdividing or sharing and thus ran afoul of Article 85(1).



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of the Cartagena Agreement, is comprised of Venezuela, Colombia,Ecuador, Peru and Bolivia. In addition to its purpose and effortsto achieve economic cooperation and integration in the region, thePact through its Commission has promulgated regulations de-signed to evaluate foreign investment, and to prevent unfair prac-tices and abuses by foreign business concerns. In accordance withthese regulations, the member states have each established gov-ernment agencies to review and consider for approval and recor-dation agreements involving the transfer of foreign technologyand know how, including franchise agreements involving foreignfranchisors. The terms of each agreement are evaluated takinginto consideration the potential contribution of the technology tothe local economy and guidelines, requirements, and prohibitionsset forth primarily in the various articles of Decision 24. OtherLatin American countries, notably Argentina, Brazil and Mexico,have established comparable procedures for evaluating and re-cording (or rejecting) agreements involving technology transfer,which would include franchise agreements. Restrictive provisionscommonly found in franchise agreements are likely to be prohib-ited or severely limited under the technology laws of this region.

V. CONCLUSIONThroughout the world franchising as an effective, profitable

and growth producing means of distribution is becoming more andmore prominent. With the emergence of franchising has come anincreasing awareness on the part of local, national and interna-tional legislative and judicial bodies of the enormous impact fran-chising is having on the economics of local communities, entirecountries, and regional economies groupings of nations, and theneed for dealing with franchising in a fair and effective way.Franchisors and franchisees should be familiar with and seek ex-pert counsel in dealing with often complex yet basic legal consid-erations, as well as the financial and commercial aspects, of theirfranchising agreements and relationships.

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