A ‘franchise’ is defined as a system whereby a franchisor grants a franchisee rights to the exclusive or semi-exclusive distribution of products or services associated with a particular trademark or patent. It can also include the right to use technology and administer a business or operational system developed or owned by a franchisor against direct or indirect remuneration. Crucially, it is not characterised as an employment relationship.
Moreover, the agreement is considered as an intuitu personae agreement, which means that it cannot be ceded to third parties without the previous acceptance of the franchisor.
The main Brazilian regulation for the offer and sale of franchises is the Franchise Law (8,955/1994). This governs all franchise chains established and operated in Brazil.
The main purpose behind the Franchise Law is to introduce transparency to the future franchise relationship. In particular, it establishes that franchisors must provide a franchise disclosure document (FDD) to prospective franchisees 10 days before the execution of any agreement or payment of any money to the franchisor or other designated recipients.
The FDD must be provided to the prospective franchisee in writing, drafted in clear and accessible terms. Although not mandatory, it is recommended that the FDD be updated annually. There are no legal statutes setting out any continuing disclosure requirements to existing franchisees, although any franchised trademarks must be filed at the Brazilian Patent and Trademark Office (BPTO) before a franchise agreement may be entered into.
Additionally, the Normative Act (16/2013) issued by the BPTO demands the recordal of international franchise agreements. The recordal is required for the following purposes:
- to make agreements effective against third parties;
- to permit the remittance of payments to foreign parties; and
- to qualify licensees for tax breaks.
In addition, the agreement must be registered with the Brazilian Central Bank, allowing the remuneration of remittance payments abroad.
Trademarks are an important asset in a franchising relationship. Any trademark licensed under a franchise agreement must be registered or at least be subject to a pending application with the BPTO. The franchisee will have rights to use the franchised trademarks only for as long as the franchise agreement is in force. Once this is terminated or has expired, the franchisee will have no further rights over the trademark.
Know-how, trade secrets and confidential information are entitled to protection in Brazil under the laws addressing unfair competition. Such protection is specified in Article 195 of the Industrial Property Law (Law 9279/96).
Copyright and related rights are protected by the Copyright Law (9,610/1998), while computer programs fall under the concept of creative effort and are therefore subject to protection by copyright under the Software Law (Law 9,609/1998).
Provided that the domain names registered by franchisees relate directly to the franchise business or the franchisor’s IP rights, a franchisor can, without limits, require a former franchisee to assign local domain names to it on termination or expiry of the franchise agreement.
Franchising and competition
The Competition Law (12,529/2012) regulates competition in Brazil and establishes rules concerning abuse of a dominant position. It lists anti-competitive practices which may constitute a breach of the economic order and therefore have an impact on franchise agreements.
The following provisions may be relevant to a franchise agreement:
- limiting or restraining market access by new companies;
- creating obstacles for the establishment, operation or development of a competitor company or supplier, purchaser or financier of a specified product or service;
- imposing on distributors, retailers or representatives of a specified product or service retail prices, discounts, payment conditions, minimum or maximum volumes, profit margins or any other marketing conditions;
- refusing to sell products or services normally available for sale; and
- tying the sale of one product to the acquisition of another or to the use of an additional service.
The Administrative Economic Protection Counsel (CADE) is the administrative government body responsible for examining and assessing any actions that may impair or limit free competition or result in the control of significant market shares.
Anti-competitive practices, especially the provisions listed above, are only characterised as such in the event that they are likely to:
- unjustifiably limit competition;
- concentrate economic power;
- dominate markets;
- arbitrarily increase profits; or
- impose abusive practices.
CADE examines specific aspects, such as:
- the peculiarities of the business;
- the product or service involved;
- the size of the market;
- the commercial sector; and
- the nature of the transaction.
Franchise agreements are generally considered pro-competitive and any restrictions imposed are intended to protect the network.
Since international franchise agreements must be submitted for recordal with the BPTO, its approval can be considered prima facie confirmation that the franchise agreement complies with the antitrust regulations. If this were not the case, the BPTO would have forwarded the agreement to CADE for analysis.
When enforcing the agreement the franchisor should consider the anti-competitive practices set out in the Competition Law. Tying provisions (eg, provisions which fix the price of products commercialised by franchisees, establish supply arrangements or make compulsory the acquisition of certain products due to specific standards of quality) may be considered admissible in the context of rule of reason. They may be found to be abusive and their validity may be questioned if such restrictions are unduly enforced by the franchisor unreasonably. For instance, extending non-compete obligations to non-competing goods could be construed as anti-competitive, depending on the circumstances.
CADE may authorise certain contractual restraints provided that:
- they are intended to increase productivity, the quality of goods or services or generate technological or economic efficiency and development;
- the resulting economic benefits are equitably distributed among the participants in the contract on one side, and the consumers on the other;
- they do not eliminate a substantial number of competitors from the relevant market; and
- they are limited to the extent necessary to fulfil their goals.
Further, the Industrial Property Law establishes that a party who discloses, exploits or uses, without authorisation, confidential knowledge, information or data usable in industry, commerce or the providing of services, except that which is in the public domain or which is obvious to a person skilled in the art, to which he or she has had access by means of a contractual or employment relationship, even after the termination of the contract, will be deemed to have committed the crime of unfair competition practice.
This article first appeared in IAM. For further information please visit www.iam-media.com.