Overview of the market

In recent years franchising has become an increasingly popular form of distribution in Russia. The first enterprises to operate franchise systems in Western Europe and North America ventured into the Russian market in 1988. As a rule, however, these were the franchise enterprises' own subsidiaries. From 1992 onwards the first franchise systems were introduced, one of the reasons being that the management of several independent subsidiaries no longer appeared adequate to ensure sufficient growth.

According to Russian Franchising Association (RAF) which provides a platform to companies offering franchise systems and complementary services, there were more than 450 franchisors and 8,500 franchisees operating businesses in Russia in 2010. Industry leaders operate in the non-food retail market with 72% of the companies located in Moscow and 13% and 12% in St. Petersburg and other regions, respectively.

Statutory regulation of franchising

Statutory provisions in Russia regulate not only a few aspects of franchising, but, rather, the entire franchise relationship. The governing provisions are those laid down in Chapter 54 of the Russian Civil Code (the “Civil Code”).

The Civil Code defines a franchise agreement (or a contract on commercial concession, as defined in the Civil Code), as one in which a franchisee is granted the right to use a complex of exclusive rights of the franchisor for business activities against payment. The legislation includes among these exclusive rights the right to use a trademark, service mark, trade designation of the enterprise and other industrial property rights, as well as the right to business information (know-how) meriting protection.

A franchise agreement must be in writing and is subject to the state registration with the Russian Patent Office (Rospatent). Failure to observe these formal requirements will render the agreement void. The registration obligation arises not only upon entering into of the agreement but also upon an amendment, early termination, and in event of termination of an agreement of indefinite duration.

It is not mandatory to specify the territory for which the license to use the exclusive rights is being granted. However, the substantive scope of the franchise agreement must be specified expressly. It is not sufficient to indicate a franchisee's area of business in a general manner, such as in the recitals to the agreement, as the Civil Code requires a "determination of the minimum and maximum scope of use".

Remuneration for the use of exclusive rights can be paid in the form of fixed non-recurrent or regular fees, deductions from the proceeds or a mark-up on wholesale prices where goods are supplied by the franchisor, or combination thereof.

The Civil Code sets forth mandatory obligations of the parties to the agreement, including obligations of the franchisor to provide to the franchisee technical and business documents required for exercise of the rights granted, and to familiarize the franchisee and its employees with the exercise of those rights. In turn, the franchisee is obliged to use its business designation in accordance with the agreement, comply with the franchisor’s instructions and safeguard the latter's business secrets. Furthermore, the franchisee has to perform its activities with the same quality as provided by the franchisor and must offer its customers the same additional services offered by the franchisor. Customers of the franchisee should be informed that the franchisor's exclusive rights are being used on the basis of a franchise agreement.

The Civil Code allows the parties to limit their rights under the franchise agreement. However, these provisions can be annulled at the request of the anti-monopoly authorities or other interested parties if such limitations contradict applicable competition law.

Recent developments of franchising regulation

Notwithstanding a rather detailed and, to some degree, successful regulation of franchising, Chapter 54 of the Civil Code provides for certain exclusionary mechanisms which hinder the development of franchising in Russia. Some argue that certain provisions of Chapter 54 are too strict and unreasonable. The most criticized provisions include the requirement for state registration of franchise agreements, liability of the franchisor for defective quality of goods or services provided by the franchisee, and that a franchisee can demand an extension of the franchise agreement on the same terms as its agreement that is due to expire.

On the initiative of RAF a draft law amending Chapter 54 was introduced last year into the Russian State Duma and passed first reading. It is expected that the amendment will be enacted in 2011. If passed, the law will provide for mandatory state registration of the franchise agreements in relation to those IP objects the exclusive rights to which occur only upon the state registration (i.e. trademarks, patents).

Further, a franchisor will be liable to consumers for defective goods or services provided by its franchisees only if it is established that any such deficiency arose from non-performance by the franchisor of its obligations. Finally, the franchisee will no longer be able to demand an extension of the franchise agreement on previous terms but will have a right to enter into a new franchise agreement for a renewal period. A franchisor will have the right to refuse to renew if the franchisee refuses to sign a new franchise agreement in the form that has been entered into by another franchisee of the franchisor.