INTERNATIONAL FRANCHISING – BUSINESS
AND LEGAL ISSUES
SOTIRIS YANAKAKIS
Franchise Attorney-at-Law
LL.M. Harvard
General Director and Legal Counsel of the FRANCHISE ASSOCIATION OF GREECE
Member of the Legal Committee of the EUROPEAN FRANCHISE FEDERATION
Vice Secretariat for the Legal matters of the MEDITERRANEAN FRANCHISE FEDERATION
Vice Secretariat for the Legal matters of the WORLD FRANCHISE COUNCIL
GENERAL
Franchises are widespread in today’s society. Consumers do
business daily with a broad range of franchised brands - buying
fast-food, coffee, gas and real estate, hiring cleaning services,
booking vacations and having their taxes prepared. However, the
popularity of franchising as a way of doing business is a relatively
recent phenomenon.
In its earliest sense, a franchise was understood as a “special
privilege to do certain things conferred by government on an individual
or corporation, and which does not belong to citizens generally of
common right”. This meaning is still relevant; the government grants
franchises to companies such as telecommunications and utility
service providers to encourage the development of a public good by
the private sector.
In the modern commercial environment, however, franchising
now generally refers to a specific and prevalent method of
doing business:
In its simplest terms, a franchise is a license from [the] owner
of a trademark or trade name permitting another to sell a
product under that name or mark. More broadly stated, a
“franchise” has evolved into an elaborate agreement under
which the franchisee undertakes to conduct a business or sell a
product or service in accordance with methods and procedures
prescribed by the franchisor, and the franchisor undertakes to
assist the franchisee through advertising, promotion and other
advisory services.
A franchise is a contract between two businesses, in which the
franchisor grants the franchisee the right to operate its business
system in return for payment of fees and royalties. The business
system typically includes intellectual property (such as trademarks,
trade names and logos), the right to sell products or services, access to
business knowledge and methods, and other physical and intangible
assets.
Franchisors may operate some of their units directly and
franchise others.
A key element of a franchise is the ongoing relationship between the
parties. The franchisor often provides continuing support or direction
regarding the operation of the business. The franchisee agrees to sell
the franchisor’s product, often exclusively, and to comply with the
franchisor’s standards. While the franchisee is an independent
business, it will usually be required to operate in a way that is
substantially similar to or indistinguishable from the operation of
the franchisor and its other franchisees.
HISTORY
The franchising concept dates back to the English
Middle Ages, when the Crown, wanting to avoid the costs and
administrative burden of hiring, paying and supervising tax
collectors, granted to officials the right to collect and keep the
Crown’s taxes in return for a fee.
Franchises were also granted for purposes such as fairs and
markets; a franchise gave an individual or group monopoly rights
over a specific activity in a location for a period of time. Usually the
individual or group that received the franchise was required to make
a payment in return, generally a share of the product or profit, which
was called a royalty.
Later, in North America, governments granted private
individuals and corporations the right to carry out activities that would
otherwise be restricted to the government, to facilitate the development of
infrastructure and services such as railroads, utilities and banking.
Modern private sector franchising first appeared in the 1850s. The
first franchise model is often attributed to the Singer Sewing Machine
Company, which created an independent distributor network for its
sewing machines. Over time, Singer developed mechanisms for greater
control over the network, giving instructions for the operation of the offices
and requiring detailed financial reporting. Although the business model
ultimately failed for Singer, the private sector franchising concept began
to take hold.
One of the first businesses to successfully employ the franchising
concept was Coca- Cola. As the company expanded across the U.S., it
licensed regional franchisee bottlers to produce and bottle soft drinks under
its trademark. Coca-Cola’s rapid expansion was funded by the franchisees,
who in return received exclusive distribution territories and support.
General Motors began distributing automobile inventory across the
country through individual dealers in 1898. Dealers could purchase vehicles
at a discounted price for resale and were granted regional franchise rights; in
return they were required to sell only the products of a single manufacturer.
This distribution method shifted to dealers some of the risks of market
downturns, and proved to be successful for the automobile industry.
In the 1930s, oil refiners licensed franchisee gasoline stations to
former employee managers to distribute their products. The refiners
found that the owner-dealers had a more personal interest in the
success of their locations, and the companies saw larger profits from
higher gas sales and from the rent from the properties. In Canada, the
Canadian Tire franchise was also successfully established in the 1930s.
During the Depression, individual retail merchants grouped
together in order to cope more efficiently with the difficult economy
and compete with large business chains. Following the Second World
War, franchising expanded to a number of new industries, including
fast food restaurants, hardware and drug retailing (including Shoppers’
Drug Mart in Canada) and motel and hotel services. There were highprofile failures associated with rapid expansion “as growth continued
unprincipled and unregulated”, but by the 1970s, franchising had
become a popular method of doing business and an enduring part of
the U.S. and Canadian economies.
Franchising also permits a more rapid expansion through a
selected market. This results from the combined effect of the more
motivated owner managers, the use of the franchisee’s capital and
the standardization of construction and business systems.
Expansion into foreign jurisdictions is often easier, because
the franchisee will take responsibility for dealing with local customs,
tastes and regulations. The reduced amount of supervision required
in a franchise system helps to overcome the problems of distance
inherent in conducting business in other provinces or countries.
Franchising is sometimes utilized, by a business which has
expanded to its limit as a corporate owned network, to exploit
markets which would otherwise be neglected.
Franchising is the fastest and safest way to become a business
owner. Rather than making all the mistakes and risking disaster at every
turn of the road, a franchisee can buy the necessary experience and
expertise. In many systems, franchisees get fantastic value in the
knowledge they obtain for the dollars invested.
When it is done properly and works well, franchising is a win/win
situation for all concerned – not just for franchisors and franchisees, but
also for consumers, landlords and suppliers. Consumers get superior
products or services more efficiently and at better prices. Landlords can
predictably increase their traffic flows and reduce the incidences of lease
defaults. Suppliers can be assured of a steady volume of purchases with
secure receivables.
THE FRANCHISE LEGAL RELATIONSHIP
1.
Potential for Conflict
The relationship between the parties to a franchise agreement is
often compared to a marriage: the parties depend on each other for their
continued well being, the relationship is intended to continue for a
lengthy period of time, and the arrangement is intended to be
satisfactory to both parties. While franchisors and franchisees generally
share a common desire to succeed, there is also considerable potential
for conflict between them. The parties frequently have dramatically
unequal bargaining power: the franchisor may have more extensive
business and franchising experience and generally has control over the
terms of the franchise agreement, while the franchisee may have little
business experience and, in any event, often must “take or leave” the
franchise agreement as offered.
The franchisee must rely to some extent on the franchisor’s
representations with respect to the potential for business success, and
some suggest that “all too often, the franchisor feels compelled to
exaggerate the expected success of the franchise to make a sale”.
In some cases, disreputable franchisors use high-pressure sales
tactics and provide inaccurate or misleading financial information.
When problems occur in the franchise, a franchisee suffering
business difficulties will be less likely than the franchisor to have the
financial resources available to fund litigation.
Various reviews of franchisor-franchisee disputes have
identified a number of areas of conflict relating to the information
and power imbalance in the relationship. The issues include:
•lack of pre-contract disclosure;
•deceptive practices, including misrepresentation of the nature
of the franchise, the range of supplies, equipment and training
to be provided in the franchise package, the value and
profitability of the franchise and the franchisor’s stability and
prior experience;
•unfair contract terms arising from a refusal by franchisors to
negotiate the terms and conditions of contracts (the “take it or
leave it” contract);
•complexity of documentation;
• excessive prices charged for mandatory goods and equipment
supplied by franchisors or other providers to franchisees, even when
items are available more cheaply from alternative suppliers;
•hidden rebates and commissions received by franchisors from
required suppliers;
•encroachment by the franchisor on the franchisee’s geographic
trading area;
•franchisor-imposed system wide changes that bear significant cost;
•failure to provide adequate service and support to franchisees;
•substantial increases to renewal fees;
•use of advertising levies for non-advertising purposes;
•transfer and renewal restrictions and franchise renewals on
different and more onerous terms; and
•unfair terminations.
FRANCHISING ETHICS

European Code of Ethics for Franchising, ‘Franchising is a system of
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WFC Ethics , ‘Franchising is a commercial development strategy
marketing goods and/or services and/or technology, which is based
upon a close and ongoing collaboration between legally and
financially separate and independent undertakings, the Franchisor
and its individual Franchisees, whereby the Franchisor grants its
individual Franchisee the right, and imposes the obligation, to
conduct a business in accordance with the Franchisor’s concept. The
right entitles and compels the individual Franchisee, in exchange for
a direct or indirect financial consideration, to use the Franchisor’s
trade name, and/or trade mark and /or service mark, know-how,
business and technical methods, procedural system, and other
industrial and /or intellectual property rights, supported by
continuing provision of commercial and technical assistance, within
the framework and for the term of a written franchise agreement,
concluded between parties for this purpose.’
based on an independent partnership between independent
commercial entities, the franchisor and the franchisees’
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PREVIOUS BLOCK EXEMPTION
EUROPEAN REGULATION No 4087/88
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‘franchise means a package of industrial or intellectual property rights
relating to trade marks, trade names, shop signs, utility models,
designs, copyrights, know-how or patents, to be exploited for the resale
of goods or the provision of services to end users’
Further to the above, it is clear that franchising has two basic aspects:
the legal (‘package of industrial or intellectual property rights) and the
business aspect (‘a system of marketing goods and/or services and/or
technology and a commercial development strategy’). Due to those
aspects and the increase of transactions and collaborations in an
international level, franchise agreements have become the preferable
model of contract for many businesses around the world.
Certainly, that quick development was expected as franchising enables a
business to expand and exploit its concept/franchise system both in
national and international level quickly and with low cost while if this
expansion proceeds carefully and according to laws and general policy
of commercial transactions, results to the success .
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WHAT HAPPENS IN FRANCHISING WORLD
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Notwithstanding the growth of franchising worldwide, only a few
countries have elaborated a special legal frame concerning franchising.
The rest of the countries that do not have such laws, apply general
provisions of national laws in order to solve problems arisen from
franchise agreements and franchise collaborations, with not always
satisfying and fair results . Besides, even in those countries that have
elaborated special laws about franchising, these laws do not cover all
aspects of franchising but treat only some of them so as very few
countries have adapted complete franchise regulations that cover all
aspects of franchising.
The growth of franchising has also resulted to the appearance of several
problems and disputes between the contracting parties that are solved
worldwide either by mediation (where this is provided) or arbitration or
Courts. However, the development of franchising around the world has
indicated that problems between franchisor and franchisees do not differ
much from one country to the other because they arise of course from
the same source which is the franchising agreement. Furthermore, it is
clear that the solutions given by Courts, arbitration or mediation are very
often more or less the similar so as we could talk at least (even if we
could not talk about a common legal framework of franchising) about a
common appreciation of the significance of franchisingwww.franchiselaw.gr
around the
FRANCHISE LAW ADAPTION MATTERS
Consequently and further to the above, the adaptation of
specific franchise laws by the countries is today more than
ever necessary because it could lead to :
◦ The achievement of security between the contracting parties .
◦ The common appreciation of franchise rights and obligations and
the common settlement of disputes between the parties
◦ The quicker development of franchising around the world as it
would be better founded and structured
◦ The achievement of more benefits and profits for the parties
(franchisor and franchisees) and less risk as franchising would
operate in a legally ‘well-framed way’
◦ The differentiation of franchising from any other kind of similar
contracts existing around the world in different countries (that are
regulated differently in each of them)
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WORLD LEGISLATION ENFORCEMENT
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The usual legal framework met in countries that have
applied special laws for franchising consists of mainly
either disclosure laws or relationship restrictions or
registration laws or all of them .
The countries that have applied such specific laws
about franchising appear in the following
presentation :
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COUNTRY
DISCLOSURE
RELATIONSHIP
REGISTRATION
LAW
RESTRICTIONS
LAWS
ALBANIA
YES
YES
NO
ALBERTA,
YES
YES
NO
AUSTRALIA
YES
YES
NO
BARBADOS
NO
NO
YES
BELARUS
NO
YES
NO
BELGIUM
YES
NO
NO
BRAZIL
YES
NO
YES
YES
YES
YES
CANADA
PEOPLE’S
REPUBLIC OF
CHINA
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COUNTRY
DISCLOSURE
RELATIONSHIP
REGISTRATION
LAW
RESTRICTIONS
LAWS
CROATIA
NO
NO
NO
ESTONIA
NO
YES
NO
FRANCE
YES
NO
NO
GEORGIA
YES
YES
NO
INDONESIA
YES
YES
YES
ITALY
YES
YES
NO
JAPAN
YES
YES
NO
KAZAKHSTAN
NO
YES
NO
KYRGYZSTAN
NO
YES
NO
LITHUANIA
NO
YES
YES
MAKAU
YES
YES
NO
MALAYSIA
YES
YES
YES
MEXICO
YES
YES
YES
GREECE
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COUNTRY
DISCLOSURE
RELATIONSHIP
REGISTRATION
LAW
RESTRICTIONS
LAWS
MOLDOVA
YES
YES
YES
NEW ZEALAND
NO
NO
NO
ONTARIO,
YES
YES
NO
YES
YES
NO
ROMANIA
YES
YES
NO
RUSSIAN
NO
YES
YES
SAUDI ARABIA
NO
YES
YES
REPUBLIC
YES
YES
YES
SPAIN
YES
NO
YES
SWEDEN
YES
NO
NO
TAIWAN
YES
NO
YES
TURKEY
NO
NO
NO
UKRAINE
NO
YES
YES
UNITED
YES
YES
YES (in 14 states)
VENEZUELA
NO
YES
NO
VIETNAM
YES
YES
YES
CANADA
PRINCE
EDWARD
ISLAND,
CANADA
FEDERATION
OF KOREA
STATES OF
AMERICA
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DISCLOSURE LAW
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financial information of the Franchisor and/or the master
Franchisee (where applicable) publishable by law of last 2-3
years
business history of the Franchisor and/or the master
Franchisee (where applicable)
a description of the franchised business.
An estimate of the total costs associated with establishing a
franchised business.
a general description of the principal characteristics of the
know -how
the provision of technical support by the Franchisor and/or
the master Franchisee (where applicable) to the Franchisee.
names and addresses of the franchise network (with special
reference to the existing franchised businesses in the case of
a master Franchisee).
www.franchiselaw.gr
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the number of Franchisees whose franchise agreement have
been terminated over the previous two (2) years and the
reasons for such termination.
information relating to all licenses required by law for the
establishment and operation of a franchised business
whenever necessary and to all prerequisites for the issue
thereof.
the essential elements of the franchise agreement such as
rights and obligations of both parties, the duration of the
agreement, conditions of renewal or termination, exclusivity
clauses etc.
information on the master franchise agreement with the
exception of the financial arrangements between Franchisor
and master Franchisee.
It is recognised that in discussing individual business
projections with Franchisees, Franchisors are invariably
involved in making assumptions which can only be tested by
the passage of time.
SPECIAL FORMALITIES
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Special definition of franchising
Obligation for a written agreement for franchising duly
signed by the parties with the provision that all existing no
written agreements should be adapted to a written form
within a specific time period of 6 months-1 year otherwise
they should be annulled .
Provision for a minimum duration of a franchise
agreement of 5 years
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REGISTRATION LAWS
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Obligation of registration of the franchise contract
before the competent public authorities in each country
or the Franchise Associations and provision of penalties
in case of violation
Obligation of registration of interruption of a
franchisor’s running of business and concept before
the competent public authorities in each country or the
Franchise Associations and provision of penalties in
case of violation
Registration of franchisor’ s first franchise point and
obligation of a previous proved operation of at least 1
year before developing each franchise system
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RELATIONSHIP LAWS
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Provisions about the post contractual relations of
the parties
Main obligations and rights of each party in a
franchise agreement
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CONCLUSION

Further to the above, it is obvious that the adaptation of
mainly a specific disclosure franchise law with few
elements concerning relationship and registration, in
different countries or even the adaptation of a common
legal frame on franchising, for instance, through a
Common Code of Ethics (ratified by a big number of
countries) with compulsory effect, using the
EUROPEAN FRANCHISE FEDERATON CODE OF ETHICS
which IS AN EXCELLENT GUIDE ,could certainly result to
the increase and development of ‘good standing’
franchise systems and the extinction of the eventual
existing ‘fake’ ones that disadvantage franchising in
order to gain the ‘win-win’ result and, consequently,
the business success for both the parties (franchisor
and franchisees).
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S.YANAKAKIS-A.KALOGEROPOULOU
LAW OFFICES
56, KIFISSIAS AVENUE ATHENS 11526 GREECE
TEL.: +30-210-6985001
FAX: +30-210-6985004
MOBILE: +30-6932200468
e-mail: soyanlaw@ath.forthnet.gr
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