Effects of franchisee’s actual use of trademarks where registration is lacking or contractual basis for licence is doubtful

Russian courts tend to support the franchisee’s obligation to make royalty payments to the franchisor if the franchisee actually used the trademark that was licensed under the franchise agreement. In cases where neither the franchise agreement nor the trademark licence was registered, actual trademark use was a reason for courts to deny the franchisee’s repayment claims based on unjust enrichment. In other cases where the franchisee argued that the parties had not agreed on the essential terms, actual trademark use constituted grounds for considering the franchise agreement as concluded and valid.

Grounds for payment of royalties where registration is lacking

One decision [1] involved a franchisee’s unjust enrichment claim for repayment of royalties where the underlying franchise agreement was not registered with Rospatent. The franchise agreement in question had been signed prior to 1 October 2014, when registration was required for validity. Despite the lack of registration, however, the court rejected the franchisee’s claim since the franchisee had already started using the licensed trademarks.

In a similar case, a sub-franchisor sued a sub-franchisee for unjust enrichment, demanding payment of royalties under an unregistered franchise agreement. The court granted a judgment in favour of the sub-franchisor since the franchisee had already started using the licensed trademark [2].

No return of payment where contractual basis for licence is doubtful

A franchisee filed an unjust enrichment claim to recover royalties paid, arguing that the franchise agreement was not valid because the parties had not agreed on all the essential terms. The court [3] held that the parties had indeed agreed on the essential terms since they had already begun performance of the agreement. As a result the agreement was valid. Since the franchisee’s royalty payments were made pursuant to a valid agreement, the court dismissed the unjust enrichment claim.

The court noted that the law in effect since 1 October 2014 requires only that the trademark licence, and not the franchise agreement, be registered, and held that the franchise agreement was effective despite the lack of trademark licence registration. The franchisee could, however, demand that the franchisor register the trademark licence.

Return of payments under pre-franchise agreement where franchise agreement is not subsequently concluded

Three decisions dealt with franchisees’ claims demanding return of advance payments made under pre-franchise agreements, arguing that the pre-franchise agreements were not valid because the parties had not agreed on all the essential terms and/or because franchise agreements had not been signed by the parties.

In two decisions [4] the repayment claims were granted:

One involved a pre-franchise agreement containing a clause that if the parties did not sign the main agreement, the advance payment would become non-refundable and would be deemed compensation for providing advisory support for the contemplated franchise operation. The court was not persuaded by such wording and did not recognise the purported support of the franchisors as valid and adequate consideration for the advance payment.

The outcome of the second decision was the same but the court also considered the pre-franchise agreement to be void because the parties had not agreed on all the essential terms; in particular, the licensed intellectual property and terms of its use were not specified.

Only in the third decision [5] was the franchisee’s claim, demanding return of the full amount (the remaining 50%) of the advance payment, dismissed:

  • The court held that the parties had agreed on the essential terms of the pre-franchise agreement as the franchisee had made payment, started using the franchisor's intellectual property, and received training.
  • Since (i) the pre-franchise agreement provided for a repayment only of 50% of the advance payment if, without fault of the franchisor, the franchisee refused to sign the franchise agreement, (ii) the franchisor had repaid that 50%, and (iii) the franchisee had failed to prove any fault on the part of the franchisor, the court dismissed the claim demanding that the second half of the advance payment also be returned.

Franchise agreement with obligation to register franchisor’s licensed trademark

A licence for use of a registered trademark is a key element in any franchise agreement. Nonetheless, a Russian court [6] recently held that despite the absence of a registered trademark at time the franchise agreement is signed, such an agreement can still be valid and qualify as a franchise agreement, provided that the parties have agreed on its essential terms. Regarding the trademark licence, it is essential that the franchise agreement includes the franchisor’s obligation to register the licensed trademark as well as the obligation of any of the parties to register the trademark licence.

If, however, the agreement omits details of the trademark licence or the licensed trademark has not been registered, the provisions relating to the trademark licence would be void. The rest of the agreement would still be valid (provided that it can be assumed that the parties had entered into the agreement without the provisions on the trademark licence), but it would no longer constitute a franchise agreement [7].

Obligation to pay licence fees despite non-use of trademark

In a case involving a well-known international sandwich chain, the sub-franchisee refused to pay royalties, claiming that the business was never opened and that it never used the trademarks. The lower courts dismissed the sub-franchisor’s claims for royalties. On appeal, the court reversed the decision, holding that royalties must be paid for the right to use intellectual property rights irrespective of whether they were ever used [8].

Automatic termination of a franchise agreement upon registration of a trade name as a trademark

A franchise agreement granted the right to use a trade name. Later on, the trade name was registered as a trademark. The court [9] ruled that registration of the trade name as a trademark effectively replaced the trade name with the trademark, extinguishing any separate trade name rights.

Under Article 1037(3) of the Russian Civil Code, if a franchise agreement grants the right to use a trade name and that right is later lost, the agreement will be automatically terminated unless the franchisor grants a similar substitute intellectual property right. The court found that since no amendment to the agreement substituting similar intellectual property rights for the trade name rights was ever signed, the franchise agreement was terminated on the date the trademark was effectively registered.