BENEFITS FROM FRANCHISING
First, he is spared from making the usual mistakes encountered by start-
up businesses, a costly proposition, having access to an existing and
proven business model. Second, he enjoys instant brand recognition
since he is allowed to use the same trademark that franchisor has been
using even prior to the operation of the franchised store. And, lastly, the
franchisee reaps the reward of owning an independent successful
business.
DEFINING THE RELATIONSHIP
“A business relationship wherein, for a consideration, the Franchisor
grants to the Franchisee a licensed right, subject to agreed upon
requirements and restrictions, to conduct business utilizing the business
format and trade/ service marks of the Franchisor”. (PH Franchise
Association)
“A right or license awarded by a company to an individual to market its
products or services in exchange for a certain fee. A franchise allows the
franchisee the right to use the company’s name and logo, and assures
him of significant support from the company in the over-all operations of
his store.” (Association of Filipino Franchisers)
LEGAL DEFINITION: There is no law in the PH defining Franchising.
Resort to foreign laws is unevitable.
BUSINESS FORMAT FRANCHISING
The franchisor, who owns the trademark and business system, commonly
referred to as the “know-how”, licenses another, called the franchisee, to
use the trademark and know-how in carrying out a business. The
franchisor not only licenses the exploitation of the trademark but his
business methods or systems as well. From this business relationship, the
franchisor and the franchisee derive commercial benefits – the
franchisor, in the form or royalties and franchise fees, and the
franchisee, in the form of profits from the business.
INDICATORS OF BUSINESS FORMAT FRANCHISING
– Continuing commercial relationship: Obligations of both
franchisor/franchisee subsists throughout the whole franchise
relationship & must be strictly performed by the parties.
– Control over Franchisee's Method of Operations: The franchisor
must have certain operating standards in place which must be
provided to the franchisee and the latter must be obligated to
abide by them.
– Obligation to Pay Fees to Franchisor: Can be a one-time franchise
fee, or a continuing fee based on percentage/gross income, or
training fee for employees.
FOUNDATIONS OF BUSINESS FORMATTING
1. Tested Business Format: A tested business format is the culmination
of all the learnings of the franchisor acquired through years of experience
in operating the business. It embraces, among others, the know-how
relating to inventory and cost control, marketing strategies, operating
procedures, product formulation, and packaging methods, etc.
→ most of this knowledge is stored in an operations manual, which in a
franchise, is usually loaned to the franchisee, who is obligated to keep
the contents confidental & to return the manual upon expiry of the
franchise.
2. Strong Brand: A strong brand connotes a brand identity that attracts
public patronage. A brand name identifies a specific product or name of a
company. Usually, these are trademarked.
→ A trademark performs a vital role in business. It identifies the source
of goods or services for the consumer. Consumers can therefore identify
which source provides quality products and those that do not. With this
capability, the consumer is provided with an informed product or service
choice.
→ Goodwill has been defined as the difference between the purchase
price of a company and the fair value of its assets. Goodwill is simply a
marker for some set of superior management behaviors.
→ Goodwill & Trademark are protected in PH law under Sec 168, IPC: “A
person who has identified in the mind of the public the goods he
manufactures or deals in, his business or services from those of others,
whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will
be protected in the same manner as other property rights.”
→ Trademark has to be registered. A strong trademark is one that is
validly registered & enjoys tremendous goodwill.
Q.IGNACIO, 2020-A
REGULATING THE FRANCHISE RELATIONSHIP
Should franchising should be regulated? 2 VIEWS:
– NO. General law on contracts & intellectual property should be
enough. Also franchisors/franchisees would better know how to
regulate themselves rather than the state.
– YES. Franchising can easily be used by the franchisor to prey on
unsuspecting franchisees.
→ Franchising regulations were intially adopted as a response to alleged
franchisor abuses.
→ The better alternative is to enact laws that would promote franchising
rather than restrict their adoption. As a business catalyst, legislation
must create the proper environment for franchising to thrive.
Examples:
– China's Commercial Franchise Administration: requires the
franchisor to have at least 2 stores each, which were operated for
at least 1 year, before offering the franchise to 3rd parties
– Malaysia Franchise Act: requires franchisee to give written
guarantee to franchisor that franchisee & his employees will not
disclose the info in the manual and that obtained while undergoing
training, after the expiry of the franchise, and for 2 years after
such termination.
TYPES OF FRANCHISE REGULATIONS
1. Disclosure Regulations: Those which require the franchisor to
provide material facts to the franchisee, before a franchise agreement is
entered into, in order that the franchisee may make an informed
decision.
US Disclosure Regulations (23)
1. Parents, predecessors, and affiliates of Franchisor
2. Employment & business experience of Franchisor's directors, key
officers, management personnel, etc.
3. Litigation filed against Franchisor & its predecessor, and any
affilliate acting for Franchisor
4. Bankruptcy filings involving Franchisor or its affiliates
5. Fees payable to Franchisor
6. Other Fees Expensees (paid after the location has been opened)
7. Estimated Initial Investment
8. Restrictions on Sources of Products and Services
→ If it's in Items 5 & 6, not included here anymore.
→ This is more on requirements for the Franchisee to buy items
from a specific vendor/supplier
→ Franchisor has to disclose if any of their officers owns an
interest in a required supplier
→ Franchisor has to disclose any other financial benefits that a
Franchisor/Franchisee association specific to the Franchisor's
trademark/advertising fund may receive from the required
suppliers
9. Obligations of the Franchisee
10. Financing arrangements
→ term, interest rates, repayment schedule, security interests,
personal guarantees, and the pertinent documents
11. Obligations of the Franchisor
→ Pre-opening assistance obligations: site selection, lease
negotiation, construction assistance, and procurement of
equipment, inventory & supplies
→ Post-opening assistance obligations: training, continuing
assistance, product development, staff selection, back office
assistance (book keeping, accounting, records management)
→ Advertising Fund: disclose requirements for contributing to the
fund, where the marketing activities are to be conducted, who
prepares them, type of media used, etc.
→ Disclosures on the Operations Manual & Training
12. Territory
13. Trademarks
14. Patents, Copyrights, and Proprietary Information
15. Obligation of the Franchisee to Participate in the Actual Operation
of the Franchise Business
16. Restrictions on goods & services offered by the Franchisee
17. Renewal, termination, repurchase, modificaiton and/or transfer of
the franchise agreement and dispute resolution
18. Public Figures
19. Financial Performance Regulations
20. List of Franchise Outlets
21. Financial Statements
22. Contracts
23. Acknowledgement of Receipt
Q.IGNACIO, 2020-A
When can a disclosure regulation/requirement be considered as
effective?
1. Informational regulation must gauge the extent and magnitude of
the risks, in order to be designed to address these risks.
2. It must ensure that reliable information is obtained and disseminated
an accessible and useable form, so that franchisees can access and use
information that they can rely upon.
3. Disclosure must ensure that franchisees can act upon the information;
otherwise no matter how reliable, accessible and useable the information
maybe, it is ineffective.
* If it does not meet these 3 conditions, it may be counter-productive
What makes a good disclosure regulation? (sir asked this in class)
Risks & challenges attached to the business; it must ensure that these
information are made available to the franchisee in a useful manner; the
disclosure must be accurate in itself
FRANCHISE DISCLOSURE REGULATION SHOULD REQUIRE FRANCHISOR
TO REVEAL:
(a) the services and products offered by the franchisor and
its affiliates, or suppliers accredited by franchisor, that must be purchased
by the franchisee;
(b) any financial benefits that a franchisor may receive from required
suppliers;
(c) the relative costs of these supplies; and
(d) how the advertising funds will be expended, i.e. what portion will be
used for television ads, printed ads, websites, etc.
2. Relationship Regulations: Relationship Regulations go beyond
providing the prospective franchisee with material information concerning
the franchise offering. This type of regulation attempts to do more – it
steps into the relationship between the Franchisor and the Franchisee and
attempts to establish acceptable norms of conduct between the two.
Examples:
– Australia: A franchisor must not induce a franchisee not to form an
association or not to associate with other franchisees for a lawful
purpose; If a franchise agreement provides that a franchisee must
pay money to a marketing or other cooperative fund, the
franchisor must have the funds audited and make such audit
available to franchisees. (Trade Practices (Industry Codes —
Franchising) Regulations 1998)
– Malaysia: Franchise term shall NOT be for less than 5 years
(Franchise Act)
– Indonesia: Franchisor must own and manage at least one outlet
of the concept being franchised
– Korea: the law mandates the return of the franchise fees paid by
the franchisee if false or exaggerated information is provided or if
the franchisor unilaterally suspends the franchise agreement
– Iowa, USA: In addition to preventing at will termination of the
franchise agreement, the Iowa statute allows the franchisee to
cure a default and prohibits the enforcement of contractual choice
of law and choice of forum clauses that will effectively result to
the avoidance ofthe Iowa statute
Disclosure Regulations v. Relationship Regulations
Which one is better? (lol nasa handout to ah)
Disclosure > Relationship
WHY?
– Relationship laws are too intrusive, impinging on right of parties
to freely stipulate terms & conditions
– Relationship regulations operate on a “one size fits all basis,”
failing to consider that NOT all franchises are alike
– The Iowa statute of preventing franchise termination at will is the
most intrusive – on one hand, it prevents franchisees from free-
riding on the franchise, but it is also the most susceptible to
abuse by franchisors.
– Disclosure regulations are not as intrusive, it's just more on info.
SUMMARY:
It must be continuously emphasized that any franchise regulation,
whether disclosure or relationship in nature, must first and foremost take
into account the peculiar nature of the franchising concept, such that it
promotes its use by ensuring that each party deliver their respective
responsibilities, namely:
(a) on the part of the franchisor, to provide a proven business format
and a strong brand;
(b) on the part of the franchisee, to continuously promote the brand by
operating the franchised outlet strictly in accordance with franchisor’s
business format employing his strong entrepreneurial drive; and
(c) for both parties to pursue, in good faith, the preservation of the
brand thereby promoting and enhancing the value of the franchised
business across all outlets in the franchised system.
Q.IGNACIO, 2020-A
PHILIPPINE STATUTES ON FRANCHISING IF THERE IS A NON-COMPETE CLAUSE, it must be
- lol there are none. At most, it is a combination of: --> LIMITED in SCOPE or BUSINESS (cannot prohibit not to engage in ANY
– Voluntary Licensing, Intellectual Property Code, under Patents business; kailangan related; there MUST also be justification why u limit it to
– General law on contracts-- Civil Code
that business)
RA 8293: THE INTELLECTUAL PROPERTY CODE --> LIMITED as to TIME --> post term distinction
--> LIMITED as to PLACE
– Sections 85-92 of the Intellectual Property Code are being applied
to franchising. These are, however, intended to apply to voluntary Solidbank v. Rivera: Thus, in determining whether the contract is
licensing of patents, particularly to technology transfer reasonable or not, the trial court should consider the following factors:
arrangements. In fact, the term “franchising” does not even (a) whether the covenant protects a legitimate business interest of the
appear in the IPC. It becomes doubtful then, that the legislative employer;
intent was for the IPC to apply to franchising. (b) whether the covenant creates an undue burden on the employee;
– Under Section 87, several stipulations in franchise agreements are (c) whether the covenant is injurious to the public welfare;
declared to be – “prima facie to have an adverse effect on (d) whether the time and territorial limitations contained in the covenant
competition” and proscribed for being “prohibited provisions”. The are reasonable; and
presence of these prohibited provisions in franchise agreements (e) whether the restraint is reasonable from the standpoint of public
automatically renders them “unenforceable” unless they are policy.
approved and registered with the Documentation, Information
and Technology Transfer Bureau of the Intellectual Property Office. So what's the problem? The IPC automatically makes any non-
compete/exclusivity clause, illegal and void. However, the realities of
But the IPC provisions might actually do more harm to franchising, franchising necessitates the presence of such clauses in franchise
because it is not cognizant of the several franchising “realities”: agreements.
1. Tie-In Agreements: It is fairly accepted practice that franchisor * The discussion on Haagen Dazs & Mcdo Case are related here
require the franchisee to source proprietary capital assets and raw
materials from franchisor or a supplier accredited by the franchisor. This
is to keep the same quality of product for all franchises. A tying
agreement is an agreement by a party to sell one product but only on the
condition that the buyer also purchases a different (or tied) product, or at
least agrees that he will not purchase that product from any other
supplier.
2. Non-Complete/ Exclusivity Clauses: The franchisor develops and
continues to develop the business format of the franchised business. The
business format is of great value to the franchisor. Having expended
substantial time, effort and funds towards its development, the franchisor
expects that the franchisee will only use the know-how in the operation of
the franchised business and only during the term of the franchised grant.
“Non-Compete” or “Exclusivity” clauses, which prohibits the franchisee
from engaging in a business in competition with that of the franchisor for
the entire duration of the franchise grant and for a fixed period after its
termination or expiration. These clauses have been consistently
maintained as valid by the Philippine Supreme Court under certain
conditions.

Q.IGNACIO, 2020-A
CIVIL CODE OF THE PHILIPPINES
- The IP Code does not define the franchise relationship, so resort has to
be made to the Civil Code.'

By process of elimination, since there is no law which defines and

establishes franchising as a commercial relationship, nor is the
relationship a quasi-contract, or a crime, or a quasi-delict, the only way
to legally establish a business format franchise that would give
enforceable rights and obligations is through the establishment of a
contract.

Evidently, as far as the Civil Code is concerned, any intervention by the

law is made after the contract has been concluded. Thus, if the party’s
consent to the franchise agreement is vitiated or there is a default the
aggrieved party will have to resort to the courts to have the agreement
declared void and to obtain damages.

If at all, the Civil Code only provides “after the fact” relief, i.e. legal
remedies only become available after the franchise agreement is
executed and expenses have been incurred by the franchisee in terms of
fees and investment in the business. To prove vitiation of consent or
default, the Code places the burden upon the franchisee. To this extent,
the Civil Code is inadequate to protect the franchisee.

As regards protection from onerous or unfair provisions, the Code simply

states that the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy. And that obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good
faith. It becomes abundantly clear that in the absence of any franchise
specific legislation, the source of rights and obligations in franchise
relationships would be the Franchise Agreement entered into by the
parties.

Q.IGNACIO, 2020-A