BENEFITS FROM FRANCHISING INDICATORS OF BUSINESS FORMAT FRANCHISING

First, he is spared from making the usual mistakes encountered by start- – Continuing commercial relationship: Obligations of both
up businesses, a costly proposition, having access to an existing and franchisor/franchisee subsists throughout the whole franchise
proven business model. Second, he enjoys instant brand recognition relationship & must be strictly performed by the parties.
since he is allowed to use the same trademark that franchisor has been – Control over Franchisee's Method of Operations: The franchisor
using even prior to the operation of the franchised store. And, lastly, the must have certain operating standards in place which must be
franchisee reaps the reward of owning an independent successful provided to the franchisee and the latter must be obligated to
business. abide by them.
– Obligation to Pay Fees to Franchisor: Can be a one-time franchise
DEFINING THE RELATIONSHIP fee, or a continuing fee based on percentage/gross income, or
“A business relationship wherein, for a consideration, the Franchisor training fee for employees.
grants to the Franchisee a licensed right, subject to agreed upon
requirements and restrictions, to conduct business utilizing the business FOUNDATIONS OF BUSINESS FORMATTING
format and trade/ service marks of the Franchisor”. (PH Franchise 1. Tested Business Format: A tested business format is the culmination
Association) of all the learnings of the franchisor acquired through years of experience
in operating the business. It embraces, among others, the know-how
“A right or license awarded by a company to an individual to market its relating to inventory and cost control, marketing strategies, operating
products or services in exchange for a certain fee. A franchise allows the procedures, product formulation, and packaging methods, etc.
franchisee the right to use the company’s name and logo, and assures → most of this knowledge is stored in an operations manual, which in a
him of significant support from the company in the over-all operations of franchise, is usually loaned to the franchisee, who is obligated to keep
his store.” (Association of Filipino Franchisers) the contents confidental & to return the manual upon expiry of the
franchise.
LEGAL DEFINITION: There is no law in the PH defining Franchising. 2. Strong Brand: A strong brand connotes a brand identity that attracts
Resort to foreign laws is unevitable. public patronage. A brand name identifies a specific product or name of a
company. Usually, these are trademarked.
BUSINESS FORMAT FRANCHISING → A trademark performs a vital role in business. It identifies the source
The franchisor, who owns the trademark and business system, commonly of goods or services for the consumer. Consumers can therefore identify
referred to as the “know-how”, licenses another, called the franchisee, to which source provides quality products and those that do not. With this
use the trademark and know-how in carrying out a business. The capability, the consumer is provided with an informed product or service
franchisor not only licenses the exploitation of the trademark but his choice.
business methods or systems as well. From this business relationship, the → Goodwill has been defined as the difference between the purchase
franchisor and the franchisee derive commercial benefits – the price of a company and the fair value of its assets. Goodwill is simply a
franchisor, in the form or royalties and franchise fees, and the marker for some set of superior management behaviors.
franchisee, in the form of profits from the business. → 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.

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REGULATING THE FRANCHISE RELATIONSHIP → Franchisor has to disclose if any of their officers owns an
Should franchising should be regulated? 2 VIEWS: interest in a required supplier
– NO. General law on contracts & intellectual property should be → Franchisor has to disclose any other financial benefits that a
enough. Also franchisors/franchisees would better know how to Franchisor/Franchisee association specific to the Franchisor's
regulate themselves rather than the state. trademark/advertising fund may receive from the required
– YES. Franchising can easily be used by the franchisor to prey on suppliers
unsuspecting franchisees. 9. Obligations of the Franchisee
10. Financing arrangements
→ Franchising regulations were intially adopted as a response to alleged → term, interest rates, repayment schedule, security interests,
franchisor abuses. personal guarantees, and the pertinent documents
→ The better alternative is to enact laws that would promote franchising 11. Obligations of the Franchisor
rather than restrict their adoption. As a business catalyst, legislation → Pre-opening assistance obligations: site selection, lease
must create the proper environment for franchising to thrive. negotiation, construction assistance, and procurement of
Examples: equipment, inventory & supplies
– China's Commercial Franchise Administration: requires the → Post-opening assistance obligations: training, continuing
franchisor to have at least 2 stores each, which were operated for assistance, product development, staff selection, back office
at least 1 year, before offering the franchise to 3rd parties assistance (book keeping, accounting, records management)
– Malaysia Franchise Act: requires franchisee to give written → Advertising Fund: disclose requirements for contributing to the
guarantee to franchisor that franchisee & his employees will not fund, where the marketing activities are to be conducted, who
disclose the info in the manual and that obtained while undergoing prepares them, type of media used, etc.
training, after the expiry of the franchise, and for 2 years after → Disclosures on the Operations Manual & Training
such termination. 12. Territory
13. Trademarks
TYPES OF FRANCHISE REGULATIONS 14. Patents, Copyrights, and Proprietary Information
1. Disclosure Regulations: Those which require the franchisor to 15. Obligation of the Franchisee to Participate in the Actual Operation
provide material facts to the franchisee, before a franchise agreement is of the Franchise Business
entered into, in order that the franchisee may make an informed 16. Restrictions on goods & services offered by the Franchisee
decision. 17. Renewal, termination, repurchase, modificaiton and/or transfer of
the franchise agreement and dispute resolution
US Disclosure Regulations (23) 18. Public Figures
1. Parents, predecessors, and affiliates of Franchisor 19. Financial Performance Regulations
2. Employment & business experience of Franchisor's directors, key 20. List of Franchise Outlets
officers, management personnel, etc. 21. Financial Statements
3. Litigation filed against Franchisor & its predecessor, and any 22. Contracts
affilliate acting for Franchisor 23. Acknowledgement of Receipt
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

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When can a disclosure regulation/requirement be considered as (Franchise Act)
effective? – Indonesia: Franchisor must own and manage at least one outlet
1. Informational regulation must gauge the extent and magnitude of of the concept being franchised
the risks, in order to be designed to address these risks. – Korea: the law mandates the return of the franchise fees paid by
2. It must ensure that reliable information is obtained and disseminated the franchisee if false or exaggerated information is provided or if
an accessible and useable form, so that franchisees can access and use the franchisor unilaterally suspends the franchise agreement
information that they can rely upon. – Iowa, USA: In addition to preventing at will termination of the
3. Disclosure must ensure that franchisees can act upon the information; franchise agreement, the Iowa statute allows the franchisee to
otherwise no matter how reliable, accessible and useable the information cure a default and prohibits the enforcement of contractual choice
maybe, it is ineffective. of law and choice of forum clauses that will effectively result to
the avoidance ofthe Iowa statute
* 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 Disclosure Regulations v. Relationship Regulations
information are made available to the franchisee in a useful manner; the Which one is better? (lol nasa handout to ah)
disclosure must be accurate in itself Disclosure > Relationship

FRANCHISE DISCLOSURE REGULATION SHOULD REQUIRE FRANCHISOR WHY?

TO REVEAL: – Relationship laws are too intrusive, impinging on right of parties
(a) the services and products offered by the franchisor and to freely stipulate terms & conditions
its affiliates, or suppliers accredited by franchisor, that must be purchased – Relationship regulations operate on a “one size fits all basis,”
by the franchisee; failing to consider that NOT all franchises are alike
(b) any financial benefits that a franchisor may receive from required – The Iowa statute of preventing franchise termination at will is the
suppliers; most intrusive – on one hand, it prevents franchisees from free-
(c) the relative costs of these supplies; and riding on the franchise, but it is also the most susceptible to
(d) how the advertising funds will be expended, i.e. what portion will be abuse by franchisors.
used for television ads, printed ads, websites, etc. – Disclosure regulations are not as intrusive, it's just more on info.

2. Relationship Regulations: Relationship Regulations go beyond SUMMARY:

providing the prospective franchisee with material information concerning It must be continuously emphasized that any franchise regulation,
the franchise offering. This type of regulation attempts to do more – it whether disclosure or relationship in nature, must first and foremost take
steps into the relationship between the Franchisor and the Franchisee and into account the peculiar nature of the franchising concept, such that it
attempts to establish acceptable norms of conduct between the two. promotes its use by ensuring that each party deliver their respective
responsibilities, namely:
Examples: (a) on the part of the franchisor, to provide a proven business format
– Australia: A franchisor must not induce a franchisee not to form an and a strong brand;
association or not to associate with other franchisees for a lawful (b) on the part of the franchisee, to continuously promote the brand by
purpose; If a franchise agreement provides that a franchisee must operating the franchised outlet strictly in accordance with franchisor’s
pay money to a marketing or other cooperative fund, the business format employing his strong entrepreneurial drive; and
franchisor must have the funds audited and make such audit (c) for both parties to pursue, in good faith, the preservation of the
available to franchisees. (Trade Practices (Industry Codes — brand thereby promoting and enhancing the value of the franchised
Franchising) Regulations 1998) business across all outlets in the franchised system.
– Malaysia: Franchise term shall NOT be for less than 5 years

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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.

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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.

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