Offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

Article 245 of the Federal Law for the Protection of Industrial Property (IPL) defines a franchise as follows:

A franchise exists whenever, in conjunction with a licence to use a trademark granted in writing, technical knowledge is transmitted or technical assistance is furnished in order to enable the licensee to produce or sell goods or render services in a uniform manner and with the operating, commercial and administrative methods established by the holder of the trademark, with the goal of maintaining the quality, prestige and image of the products or services distinguished by the trademark.

 

Laws and agencies

What laws and government agencies regulate the offer and sale of franchises?

Franchises in Mexico are governed and regulated by the IPL and its regulations. The governmental agency in charge of applying the IPL is the Mexican Institute of Industrial Property (IMPI). In addition, there are other laws that may have an application to franchises depending on the type of activity performed in Mexico, such as the Commercial Code, the Consumer Protection Federal Law, the Economic Competition Federal Law (the Antitrust Law), the Federal Law for Personal Data Protection Possessed by Private Persons, the General Law of Business Organisations and the Federal Civil Code.

Principal requirements

What are the principal requirements governing the offer and sale of franchises under the relevant laws?

The IPL requires that, prior to granting a franchise, the franchisor’s information (disclosure document) must be provided to the prospective franchisee at least 30 business days before the execution of the franchise agreement.

Franchise agreements must be in writing and contain the following minimum provisions:

  • the geographical zone in which the franchisee shall mainly perform the activities that are the subject matter of the agreement;
  • the location, minimum size and investment characteristics of the infrastructure, relating to the premises in which the franchisee shall carry out the activities deriving from the agreement;
  • if applicable, the policies of inventories, marketing and advertising, as well as the provisions relating to the merchandise supply and the engagement with suppliers;
  • the policies, procedures and terms for any reimbursement, financing and other considerations in charge of the parties;
  • the criteria and methods applicable to determining the franchisee’s commissions and profit margins;
  • the characteristics of the technical and operational training of the franchisee’s personnel, as well as the method or manner in which the franchisor shall provide technical assistance to the franchisee;
  • the criteria, methods and procedures of supervision, information, evaluation and grading of the performance and quality of the services under the respective responsibility of the franchisor and the franchisee;
  • the terms and conditions of any sub-franchise, in the event it is agreed by the parties;
  • termination causes under the franchise agreement;
  • events under which the parties may review and, if this happens, mutually agree to amend the terms or conditions of the franchise agreement;
  • if applicable, provisions regarding the franchisee’s obligation to sell its assets to the franchisor or the franchisor’s designated representative, upon the termination of the franchise agreement; and
  • if applicable, provisions regarding the franchisee’s obligation to sell or transfer the shares of its company to the franchisor or to make the franchisor a partner of the company.

 

The Commercial Code and the Federal Civil Code

Franchise agreements are governed by the IPL and by the general rules of contracts contained in the Commercial Code and the Federal Civil Code. Commercial activities and contracts in Mexico, such as franchise agreements, are regulated by the general principle of contractual liberty, which applies to all provisions and aspects of a franchise agreement not specifically regulated by the IPL.

 

The Federal Consumer Protection Law

The governmental body in charge of applying this law is the Federal Consumer Protection Agency. In general, this law protects consumers and regulates the activities of providers selling goods and rendering services to the consumers. Its provisions include protection for consumers and restrictions regarding the use of information pertaining to the consumers, information provided and advertisements, promotions and offers, services, credit transactions, real estate transactions, warranties, and adhesion contracts, among others.

 

The Federal Economic Competition Law

The governmental body in charge of applying this law is the Federal Economic Competition Commission. In accordance with the provisions of this law, there are some restrictions on the general principles of contractual freedom, such as when, through agreements, arrangements or a combination of acts between economic agents, the production, processes, distribution or commercialisation of goods and services is diminished, harmed or impeded, in which case the situations are considered monopolistic practices. Infringements of the provisions of the Federal Economic Competition Law may result in the nullity of the acts and agreements in violation of the law and the imposition of administrative fines or the payment of damages and losses to third parties.

 

The Federal Law for Personal Data Protection Possessed by Private Persons

The government body in charge of applying this law is the National Institute of Transparency, Access to Information and Personal Data Protection. The main purpose of this law is to protect personal data held by private persons in order to regulate the lawful, informed and controlled treatment of said data, with the objective of ensuring the right to privacy as well as the right of control over personal data for persons. The law protects personal data that is subject to treatment, use or transfer at a national and international level.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

The IPL is the general applicable law, therefore all franchises operating in Mexico, either through the scheme of master franchise, sub-franchise or individual or unit franchise, are subject to its provisions. The IPL does not provide for any exemptions or exclusions as to its applicability to franchises and does not provide the regulatory authority in charge of its application (IMPI) with the discretion to determine whether a particular distribution or similar arrangement is considered a franchise or not, regardless of its name. There are no exemptions for partnership relationships, wholesale distribution agreements or specific industries (for example, gasoline dealers or automotive dealers) if the relationship meets the definition of a franchise set forth in the IPL.

Franchisor eligibility

Must franchisors satisfy any eligibility requirements in order to offer franchises? Are there any related practical issues or guidelines that franchisors should consider before offering franchises?

In terms of the IPL and its regulations, the only requirement that must be met before a franchisor may offer a franchise is the submission of the disclosure document. The IPL states that disclosure must be provided to the prospective franchisee or master franchisee at least 30 days before entering into the corresponding agreement. According to the provisions of the IPL, all terms provided for in that law must be calculated on business days pursuant to the calendar published every year by the IMPI.

The IPL does not provide for any obligation to update the information contained in the disclosure document, which must be accurate at the time it is delivered to the prospective franchisee.

In accordance with the provisions of the regulations of the IPL, the following technical, economic and financial information must be provided through the submission of the disclosure document:

  • the name, corporate name or business name, domicile and nationality of the franchisor;
  • description of the franchise;
  • the seniority of the original main franchisor and, if applicable, of the master franchisee of the business subject matter of the franchise;
  • any intellectual property rights involved in the franchise;
  • the amounts and concepts of payments that the franchisee must make to the franchisor;
  • the types of technical assistance and services that the franchisor must provide to the franchisee;
  • a definition of the geographical area in which the business exploiting the franchise operates;
  • the rights or restrictions to grant sub-franchises to third parties and, if applicable, the requisites the franchisee must fulfil to grant sub-franchises;
  • the obligations of the franchisee with respect to the confidential information provided by the franchisor; and
  • in general, the obligations and rights of the franchisee arising from the execution of the franchise agreement.

 

Franchisee and supplier selection

Are there any legal restrictions or requirements relating to the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers? What practical considerations are relevant when selecting franchisees and suppliers?

No, there are no restrictions as to the manner in which a franchisor may recruit franchisees or select its own or its franchisees’ suppliers.

Pre-contractual disclosure – procedures and formalities

What procedures and formalities for pre-contractual disclosure are required or advised in your jurisdiction? How often must the disclosures be updated?

The IPL states that disclosure must be provided to the prospective franchisee or master franchisee at least 30 days before entering into the corresponding agreement. According to the provisions of the IPL, all terms provided for in that law must be calculated on business days pursuant to the calendar published every year by the IMPI.

The IPL does not provide for any obligation to update the information contained in the disclosure document, which must be accurate at the time it is delivered to the prospective franchisee.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The IPL makes no distinction in its applicability to master, individual or unit franchises. Its provisions and the disclosure obligations apply to all types of franchises to be established in Mexico.

The IPL requires ‘the grantor of a franchise’ to provide disclosure to a prospective franchisee. This requires any franchisor, including a master franchisee acting as a franchisor, to provide disclosure to the prospective franchisee.

Assuming the master franchisee holds sufficient rights in the franchise to execute a sub-franchise agreement, then the master franchisee would also qualify as the grantor of a franchise and be required to provide disclosure to a prospective sub-franchisee. Even if the franchisor is a party to the sub-franchise agreement, the master franchisee must provide the disclosure since it is the actual grantor of a franchise. In the case of a sub-franchising structure, the disclosure document must contain the same level of information applicable to any franchise, but, in addition, it must describe the relationship between the franchisor and the master franchisee, from which the rights of the master franchisee to grant sub-franchises derives.

Due diligence

What due diligence should both the franchisor and the franchisee undertake before entering a franchise relationship?

Aside from the obligation for a franchisor to provide disclosure to a prospective franchisee in accordance with the applicable legal provisions in Mexico, there is no legal obligation for the parties to carry out any due diligence. Notwithstanding the foregoing, it is recommended for both franchisors and franchisees to carry out due diligence prior to entering into a franchise transaction. This due diligence may include market studies on the commercial feasibility of the potential franchised business in the territory, as well as independent investigations on the prospective franchisee, including criminal history, credit condition and liens or encumbrances over the assets of the prospective franchisee or its principal owners. Any potential franchisee must carefully review the legal status of the trademarks that may be licensed under a franchise agreement.

What must be disclosed

What information must the disclosure document contain?

In accordance with the provisions of the regulations of the IPL, the following technical, economic and financial information must be provided through the submission of the disclosure document:

  • name, corporate name or business name, domicile and nationality of the franchisor;
  • description of the franchise;
  • seniority of the original main franchisor and, if applicable, of the master franchisee of the business subject matter of the franchise;
  • intellectual property rights involved in the franchise;
  • amounts and concepts of payments that the franchisee must make to the franchisor;
  • types of technical assistance and services that the franchisor must provide to the franchisee;
  • definition of the geographical area in which the business exploiting the franchise operates;
  • rights or restrictions to grant sub-franchises to third parties and, if applicable, the requisites the franchisee must fulfil to grant sub-franchises;
  • obligations of the franchisee with respect to the confidential information provided by the franchisor; and
  • in general, the obligations and rights of the franchisee arising from the execution of the franchise agreement.
Continuing disclosure

Is there any obligation for continuing disclosure?

Once the disclosure document is delivered and the obligation contained in the applicable provisions of the IPL is fulfilled, no ongoing disclosure obligation exists. Though not addressed by the IPL, disclosure should be provided to both a renewing franchisee and to a transferee franchisee, but this does not imply the creation of a continuing disclosure obligation.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

The disclosure obligation may be enforced by the IMPI through the imposition of fines in the event of violation.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

Failure of a franchisor to provide the disclosure document at least 30 business days prior to the date of execution of a franchise agreement may result in the imposition of an administrative fine by the IMPI. This will only occur, however, if the franchisor fails to provide such information after a written request for it has been made by the prospective franchisee to the franchisor.

In the event of lack of veracity of the disclosed information, the franchisee will be entitled to request the judicial authority to nullify the franchise agreement and to award payment of corresponding damages and losses.

Under Mexican law, there are only damages (as a general figure) and losses; the law does not contemplate other damages such as consequential and punitive damages. According to the provisions of the Federal Civil Code, damages are defined as the decrease or reduction of the patrimony resulting from the breach of an obligation, and losses are defined as the privation of a licit gain that would have been obtained as a consequence of the compliance of an obligation. A competent judge with jurisdiction over the matter would have to calculate the corresponding damages and losses based on the evidence offered by the affected party.

Failure to disclose – enforcement and remedies

What actions may franchisees or any relevant government agencies take in response to a franchisor’s failure to make required disclosures? What legal remedies are available? What penalties may apply?

The only individual or entity liable for a breach of the disclosure obligation is the individual or entity that will effectively grant the franchise. There is no extended liability of the officers, directors or employees of the franchisor for violation of this legal obligation.

General legal principles and codes of conduct

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what general principles of law affect the offer and sale of franchises? What industry codes of conduct may affect the offer and sale of franchises?

The only laws that govern the offering and selling of franchises are the IPL, the Regulations of the IPL, the Commercial Code and the Federal Civil Code. Franchise transactions are ruled by the general principle of contractual liberty, provided that the terms and conditions contemplated by or contained in the relevant agreements are not against these laws. If the franchisee is able to prove that his or her consent to enter into a franchise agreement was granted based on an error the franchisee made owing to violence or bad faith on the part of the franchisor, then the franchisee may be entitled to exercise a legal action and claim for the nullity of the agreement.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

In addition to the obligation for all franchisors to provide and deliver a disclosure document to their prospective franchisees, which must comply with all requisites established by the IPL and its Regulations and be delivered at least 30 business days prior to entering into the corresponding franchise agreement, there are no other obligations that would apply to presale disclosure. The disclosure document may be prepared in Spanish or in any other language familiar to the prospective franchisee. There is no obligation to register the disclosure document or to obtain authorisation from any governmental agency as to the form and content of the disclosure document.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises?

Depending on the specific fraudulent conduct of the franchisor, the franchisee may request the nullity of the franchise agreement, the payment of damages and losses and, in some particular cases, criminal prosecution for fraud.

Law stated date

Correct on

Give the date on which the above content is accurate.

2 July 2020.