Franchise lawi Legislation
Brazilian Law No. 8,955 of 15 December 1994 (the Franchise Law) governs all franchise relationships that are 'established and operated within the Brazilian territory'.
The Franchise Law is not intended to govern the private franchisor–franchisee relationship, but rather to make this relationship more transparent by requiring the franchisor to provide clear and detailed information to prospective franchisees in a written franchise disclosure document (FDD). The FDD does not have to be recorded or registered with any agency and remains a private document between the parties.
The FDD must be in clear and accessible terms and must be delivered to the prospective franchisee at least 10 days prior to the execution of any binding document related to the franchise and receipt of any payment.
Even when an international franchise agreement is governed by foreign law and elects foreign jurisdiction, the delivery of the FDD to a prospective franchisee is mandatory since the franchise will be operated in Brazil.ii Pre-contractual disclosure
As mentioned above, the Franchise Law requires the delivery of the FDD, containing information on several aspects of the business, to prospective franchisees at least 10 days prior to the execution of any binding document related to the franchise, or receipt of any payment.
Failure by the franchisor to supply the FDD within the terms established by the Franchise Law entitles the franchisee to argue for the nullity of the agreement and the return of all amounts paid to the franchisor or to third parties indicated by the franchisor in the way of the initial fee and royalties, and for the recovery of damages.
Below is a list of the information the Franchise Law requires to be included in the FDD in clear and comprehensive language:
- a summary of the background, business form and complete name or commercial name of the franchisor company and of all related companies, as well as their respective trade names and addresses;
- balance sheets and financial statements of the franchisor company for the two preceding years, although an audit is not required;
- a clear description of all pending lawsuits involving the franchisor and its related companies, sub-franchisors and the owners of intellectual property rights used in the franchising system relating to or arising from the franchise agreement, which, depending on the outcome, may affect the continuance of the franchised business;
- a detailed description of the franchise, general description of the business and the activities that will be performed by the franchisee;
- a profile of the ideal prospective franchisee as regards prior experience, educational requirements, etc.;
- a requirement for the direct involvement of the franchisee in the franchise operation;
- specifications regarding:
- estimated initial investment necessary for the establishment and start-up of franchise operations;
- value of the initial affiliation fee or franchise fee and guarantees (if any amount is specified by the franchisor); and
- estimated cost of the facilities, equipment and initial inventory and the respective payment conditions for these;
- periodic compensation for the use of the system, of the trademark or for services provided by the franchisor to the franchisee (royalties);
- payments for lease of the equipment or premises;
- advertising fees or similar payments;
- minimum insurance coverage amounts; and
- other amounts due to the franchisor or related third parties;
- supervision of the franchise chain;
- orientation or guidance services provided by the franchisor to the franchisee for operating the business, and other services rendered to the franchisee, aside from training;
- training of the franchisee, specifying its duration, content and cost;
- training of the employees of the franchisee;
- franchise manuals;
- assistance on the assesment and selection of the location where the franchisee unit will be established; and
- layout and architectural plans of the facility of the franchisee, if applicable;
Although the Franchise Law prescribes that franchise agreements are valid and enforceable irrespective of whether they are registered, the registration of franchise agreements at the INPI is indispensable. The purpose of the registration is threefold:
- to make the agreement effective against third parties;
- to permit the remittance of payments to the foreign party; and
- to qualify the licensee for tax deductions.
In addition to registering the franchise agreement with the INPI, registration of the agreement at the Central Bank is also required for the purposes of remuneration remittances.
Although the FDD remains a private document between the parties, for the purposes of registration of franchise agreements with the INPI, the parties are also required to present to the INPI evidence of the receipt of the FDD by the franchisee.
In addition, the franchise agreement must bear the signature of the representatives of both parties along with two witnesses. Signatures collected abroad must be notarised and legalised by the local Brazilian consulate.iv Mandatory clauses
As mentioned above, the Franchise Law is not a relationship law. The INPI's assessment of the registration of franchise agreements tends to focus on the validity of the trademarks in Brazil and the specification in the agreement of their serial number at the INPI. The INPI also verifies whether the licensor is the owner of the licensed trademarks or duly authorised by the owner to license them to third parties.
Therefore, the parties should stipulate in the agreement all the terms and conditions of the franchise relationship, including, without limitation, territory, term, payment terms, licensed trademarks, authorised products, conditions for opening an outlet, marketing-related obligations, IP protection clauses, events of termination, consequences of termination, law and jurisdiction.
The parties may freely set out the percentage of royalties insofar as it stays within the price range customary in that field and in the national and international market. Payments may be established as a percentage of the net sales or by means of a fixed amount based on each unit produced.
Nevertheless, royalties involving related companies such as parents and subsidiaries are limited by the corresponding ceiling of fiscal deductibility specified by Ministerial Ordinance No. 436/58, which varies between 1 per cent and 5 per cent of the net sales price depending on the field of industry involved.
Normative Act 70, enacted by the INPI on 12 April 2017, entered into force on 1 July 2017, with the purpose of modernising the industrial property system in Brazil.
The new Act substantially limited INPI's power to interfere in the assessment and registration of agreements, as the INPI shall no longer assess the agreements in light of fiscal or foreign exchange regulations currently in force.
Before Normative Act 70 was enacted, the INPI had always assessed the applicable maximum percentages for remittance of royalties between affiliated companies, such as parents and subsidiaries.
With the issuance of Normative Act 70, the INPI will, from now on, simply indicate in the Certificate of Registration the information stated by the parties, who will be fully and solely responsible in the event of non-compliance with these rules, and liable for any penalties.v Guarantees and protection
In Brazil, guarantees from both individuals and companies in connection with franchise agreements are, as a general rule, valid and enforceable. Under Brazilian law, a guarantee is used as a way to secure a debtor's obligation; this security might be provided by real estate or movable property (in rem), or by a person, a third party to the debt–credit relationship (in personam) who will assure the debtor's debt.
The in rem guarantees are established in the Civil Code under Articles 1361 to 1368A and Articles 1419 to 1510. They are namely fiduciary property, pledge, mortgage and antichresis. One element that the in rem guarantees have in common is that any clause authorising the creditor to keep the object of the guarantee, if the debt is not paid at maturity, is null and void. The satisfaction of the debt occurs via the proceeds of the sale of the asset given as surety. To that effect, the sale has to follow a specific procedure established by applicable laws. There are certain formalities and registrations required for such guarantees to be valid and enforceable in Brazil.
While particular assets of the debtor are assigned under in rem guarantees, under in personam guarantees, all the guarantor's assets might serve to assure the obligation. The in personam guarantees legally permitted in credit–debt relations are the fiança, or surety, and the aval, a specific guarantee used to secure debt instruments.
Practice shows that most of the franchise agreements in Brazil use the personal guarantee (usually fiança) to assure franchisor's interests against the franchisee failing to fulfil the debt. As a general rule, this type of guarantee must be executed by the guarantor, its spouse – if the guarantor is married, and in accordance with the 'universal community' or 'partial property' property regime – and two witnesses.