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American Chamber of Commerce & Industry of Panama American Franchise Forum May 11, 2007 Key Considerations in an International Franchise Contract Presented.

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Presentation on theme: "American Chamber of Commerce & Industry of Panama American Franchise Forum May 11, 2007 Key Considerations in an International Franchise Contract Presented."— Presentation transcript:

1 American Chamber of Commerce & Industry of Panama American Franchise Forum May 11, 2007 Key Considerations in an International Franchise Contract Presented by: Jose I. Rojas Rojas Law Firm LLP Rojas Law Firm LLP Miami, Florida Miami, Florida

2 International Franchising According to recent report from IFA Education Foundation more than half of U.S. based companies surveyed are seeking franchises in other countries According to recent report from IFA Education Foundation more than half of U.S. based companies surveyed are seeking franchises in other countries Eighty percent of same respondents are planning to franchise internationally from 2007 – 2009 Eighty percent of same respondents are planning to franchise internationally from 2007 – 2009 Also increasing number of non-U.S. franchises expanding into U.S. Also increasing number of non-U.S. franchises expanding into U.S.

3 Amended Federal Trade Commission (FTC) Franchise Rule Approved by the FTC on January 22, 2007 Approved by the FTC on January 22, 2007 Effective on a voluntary basis on July 1, 2007 Effective on a voluntary basis on July 1, 2007 Mandatory for all franchises offered or sold on/after July 1, 2008 Mandatory for all franchises offered or sold on/after July 1, 2008 New exemptions: New exemptions: Sales of franchises located outside of the United StatesSales of franchises located outside of the United States Franchises involving investments of at least $1MMFranchises involving investments of at least $1MM Investments by franchisees with 5 years business experience and net worth of at least $5MMInvestments by franchisees with 5 years business experience and net worth of at least $5MM Sales to certain officers, owners and managers of franchisorsSales to certain officers, owners and managers of franchisors No more broker disclosure or venue/law choice risk factors No more broker disclosure or venue/law choice risk factors Timing of disclosures simplified Timing of disclosures simplified Duty to provide a disclosure at first personal meeting deletedDuty to provide a disclosure at first personal meeting deleted Ten business day counting problem eliminatedTen business day counting problem eliminated

4 Amendments to FTC Franchise Rule continued… New disclosure highlights: New disclosure highlights: Additional disclosure information requirements:Additional disclosure information requirements: Information about franchisors parent (financial statements); Information about franchisors parent (financial statements); Information about franchisor-initiated litigation against franchisees; Information about franchisor-initiated litigation against franchisees; Information about the existence of trademark-specific franchisee associations; Information about the existence of trademark-specific franchisee associations; Earnings claims, renamed as Financial Performance Representations, may be provided in separate document; Earnings claims, renamed as Financial Performance Representations, may be provided in separate document; Franchisee turnover information to be presented in such way as to reduce likelihood of double counting transfers and terminations; Franchisee turnover information to be presented in such way as to reduce likelihood of double counting transfers and terminations; Information about the use of confidentiality agreements Information about the use of confidentiality agreements New prohibitions: New prohibitions: Requiring a prospective franchisee to waive reliance on a representation made in a disclosure statement or its exhibits and amendmentsRequiring a prospective franchisee to waive reliance on a representation made in a disclosure statement or its exhibits and amendments Using shills (compensated by franchisors) to promote franchisesUsing shills (compensated by franchisors) to promote franchises

5 Advantages of the Amended Rule Elimination of first personal meeting disclosure Elimination of first personal meeting disclosure Elimination of duty to provide a completed copy of a franchise agreement to prospective franchisee five (5) business days before execution Elimination of duty to provide a completed copy of a franchise agreement to prospective franchisee five (5) business days before execution Exemptions from compliance for franchisee transactions involving: Exemptions from compliance for franchisee transactions involving: Large investments;Large investments; Franchises granted to experienced high-net worth companies;Franchises granted to experienced high-net worth companies; Franchises granted to managers and owners of franchisorsFranchises granted to managers and owners of franchisors Relaxation of obligation for all disclosure statements to include financial statements of franchisors prepared according to U.S. standards Relaxation of obligation for all disclosure statements to include financial statements of franchisors prepared according to U.S. standards Electronic disclosures (e.g., or Internet) Electronic disclosures (e.g., or Internet) Lengthened time period for annual updating of disclosure document from 90 to 120 days Lengthened time period for annual updating of disclosure document from 90 to 120 days

6 FTC Audit Requirement for Foreign Franchisors Disclosure documents must include audited financial statements of the franchisor Disclosure documents must include audited financial statements of the franchisor Audits must be performed in accordance with U.S. Generally Accepted Auditing Standards (GAAS) Audits must be performed in accordance with U.S. Generally Accepted Auditing Standards (GAAS) The Amended Rule allows for foreign companies to use statements prepared under their countrys Generally Accepted Accounting Principles (GAAP) The Amended Rule allows for foreign companies to use statements prepared under their countrys Generally Accepted Accounting Principles (GAAP) Must satisfy criteria published by the U.S. Securities and Exchange Commission (SEC) for the use of foreign financial statements in U.S. securities offerings.Must satisfy criteria published by the U.S. Securities and Exchange Commission (SEC) for the use of foreign financial statements in U.S. securities offerings.

7 Countries and U.S. States Regulating Offer and Sales of Franchises Approximately sixteen (16) countries, and fifteen (15) states, regulate the offer and sales of franchises. Approximately sixteen (16) countries, and fifteen (15) states, regulate the offer and sales of franchises. Countries: Countries: Australia, Brazil, Canada (Provinces of Alberta and Ontario), China, France, Indonesia, Italy, Japan, Malaysia, Mexico, Romania, Russia, South Africa, South Korea, Spain, and the U.S.Australia, Brazil, Canada (Provinces of Alberta and Ontario), China, France, Indonesia, Italy, Japan, Malaysia, Mexico, Romania, Russia, South Africa, South Korea, Spain, and the U.S. U.S. States: U.S. States: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and WisconsinCalifornia, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin

8 Franchise Regulations in the Americas Aside from the United States and Canada (Provinces of Alberta and Ontario, and Prince Edward Island), Mexico and Brazil have franchise regulations. Aside from the United States and Canada (Provinces of Alberta and Ontario, and Prince Edward Island), Mexico and Brazil have franchise regulations. Mexico: Mexico: Governed by Articles 65 & 142 of the Mexican Industrial Property Law (MIPL); amended (Art. 142) in 2006Governed by Articles 65 & 142 of the Mexican Industrial Property Law (MIPL); amended (Art. 142) in 2006 Pre-contract Disclosures requiredPre-contract Disclosures required Franchise agreements and list of trademarks must be recorded before the Mexican Institute of Industrial Property (IMPI)Franchise agreements and list of trademarks must be recorded before the Mexican Institute of Industrial Property (IMPI) Brazil: Brazil: New Business Franchise Law went into effect on February 14, 1995 (the first to govern franchise agreements in Brazil)New Business Franchise Law went into effect on February 14, 1995 (the first to govern franchise agreements in Brazil) Franchisors required to provide prospective franchisee with a Franchise Offering Letter with relatively modest disclosuresFranchisors required to provide prospective franchisee with a Franchise Offering Letter with relatively modest disclosures Franchisor must submit the Franchise Offering Letter to the Brazilian Institute of Industrial Property (INPI) for approvalFranchisor must submit the Franchise Offering Letter to the Brazilian Institute of Industrial Property (INPI) for approval Franchise agreements executed abroad must be translated into Portuguese and registered with the Registry of Deed and Documents in Brazil along with list of trademarksFranchise agreements executed abroad must be translated into Portuguese and registered with the Registry of Deed and Documents in Brazil along with list of trademarks

9 Individual U.S. State Offices Administering Business Opportunity Disclosure Laws Twenty-six states have business opportunity laws. Twenty-six states have business opportunity laws. Most prohibit sales of business opportunities unless the seller gives potential purchasers a pre-disclosure document filed with a designated state agency. Most prohibit sales of business opportunities unless the seller gives potential purchasers a pre-disclosure document filed with a designated state agency. Although the Franchise Rule may not require a seller pre- disclosure document, at least some form of prior registration is usually required by the laws of the states listed below: Although the Franchise Rule may not require a seller pre- disclosure document, at least some form of prior registration is usually required by the laws of the states listed below: Connecticut, Florida, Georgia, Illinois, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia*, Washington, Wisconsin *Only Virginia expressly excludes offers to foreign franchisees

10 Business Opportunity Registration or Exemption Exemption is automatic in some U.S. states Exemption is automatic in some U.S. states One-time exemption filing required in: One-time exemption filing required in: Kentucky, Nebraska and TexasKentucky, Nebraska and Texas Annual exemption filing required in: Annual exemption filing required in: Florida and UtahFlorida and Utah Exemption for franchisors who have obtained registration of trademarks or service marks involved in the franchise: Exemption for franchisors who have obtained registration of trademarks or service marks involved in the franchise: Connecticut, Maine, North Carolina and South CarolinaConnecticut, Maine, North Carolina and South Carolina

11 International Issues Practical aspects: Practical aspects: If US-based and already has UFOC, likely will just provide wrap-around disclosure rather than separate, country-specific circularIf US-based and already has UFOC, likely will just provide wrap-around disclosure rather than separate, country-specific circular Modification of standard agreements will be requiredModification of standard agreements will be required Traditional Master Franchising vs. Joint Venture with Local Sub-franchisor Traditional Master Franchising vs. Joint Venture with Local Sub-franchisor Differences between Civil Law approach and Common Law approach Differences between Civil Law approach and Common Law approach Civil Code countries – shorter agreements because more details in Code;Civil Code countries – shorter agreements because more details in Code; Common Law countries, spell out in great detail in the agreementsCommon Law countries, spell out in great detail in the agreements Need to work with local counsel in specific jurisdiction Need to work with local counsel in specific jurisdiction

12 Some Essential Elements of a Franchise Agreement Licensing of intellectual property to the franchisee Licensing of intellectual property to the franchisee Trademarks (representation of goods or services)Trademarks (representation of goods or services) Copyright (right given to the creator/owner in the work)Copyright (right given to the creator/owner in the work) Know-How (technical knowledge, commercial information and experience developed) Know-How (technical knowledge, commercial information and experience developed) Definitions Definitions Grant clause; Territorial Rights & Expansion; Internet Grant clause; Territorial Rights & Expansion; Internet Franchisor & Franchisee obligations – performance standards Franchisor & Franchisee obligations – performance standards Clauses relating to payment Clauses relating to payment Assignment/Cession/Alienation of Rights Assignment/Cession/Alienation of Rights Default & Cure clauses; Default & Cure clauses; Buyout & Friendly Divorce clauses Buyout & Friendly Divorce clauses Clauses relating to severability where void or illegal Clauses relating to severability where void or illegal

13 Essential Elements -- Continued… Amendments Amendments Restraint of Trade Restraint of Trade Non-Disclosures and Confidentiality Non-Disclosures and Confidentiality Provisional Periods & Renewals Provisional Periods & Renewals Repurchases on Termination Repurchases on Termination Dispute Resolution Dispute Resolution Choice of lawChoice of law Choice of forumChoice of forum ArbitrationArbitration Arbitral Arbitral Number of Arbitrators Number of Arbitrators Standard rules Standard rules Additional or modified provisions Additional or modified provisions

14 International Issues Source: Prof. Avv Aldo Frignani, U. of Turin, IFA/IBA – Emerging Trends and Difficult Issues in International Franchising

15 United States Trademark Process Administered by the United States Patent and Trademark Office (USPTO) Administered by the United States Patent and Trademark Office (USPTO) Considerations: Considerations: Hire an attorney – Search availability; confusingly similar usesHire an attorney – Search availability; confusingly similar uses Common law issuesCommon law issues Basis for filing:Basis for filing: Actual use in commerce Actual use in commerce Intent to use mark in commerce Intent to use mark in commerce Potential oppositions to markPotential oppositions to mark USPTO process time is from 12 – 18 months USPTO process time is from 12 – 18 months Maintaining a federal registration: Maintaining a federal registration: File declaration of use between 5 th & 6 th year after registrationFile declaration of use between 5 th & 6 th year after registration Renewal of registration to be filed every ten (10) yearsRenewal of registration to be filed every ten (10) years

16 International Trademark Filing Strategies Paris Convention Background: Background: The Paris Convention for the Protection of Industrial Property Rights: The Paris Convention for the Protection of Industrial Property Rights: Administered by the World Intellectual Property Organization (WIPO)Administered by the World Intellectual Property Organization (WIPO) Signed March 20, 1883 in Paris, took effect July 7, 1884 and revised in Stockholm in 1967Signed March 20, 1883 in Paris, took effect July 7, 1884 and revised in Stockholm in 1967 One of the first intellectual property treatiesOne of the first intellectual property treaties Protection includes patents, trademarks, trade names and repression of unfair competitionProtection includes patents, trademarks, trade names and repression of unfair competition The Convention expressly:The Convention expressly: stipulates requirements for trademark filing and registration shall be prescribed be each member country as domestic law; stipulates requirements for trademark filing and registration shall be prescribed be each member country as domestic law; regulates the scope of protection of marks; regulates the scope of protection of marks; Allows member countries to stipulate more thorough protection in the domestic law Allows member countries to stipulate more thorough protection in the domestic law Establishes priority rightsEstablishes priority rights An applicant from one member country may use its first filing date as effective filing date in another member country An applicant from one member country may use its first filing date as effective filing date in another member country Must be filed within six (6) months from first filing Must be filed within six (6) months from first filing

17 International Filing Strategies The Madrid Agreement The Madrid Agreement for the protection of international marks: The Madrid Agreement for the protection of international marks: Adopted in 1891Adopted in 1891 Contracting countries of the Paris Convention are members of the Madrid AgreementContracting countries of the Paris Convention are members of the Madrid Agreement Simplifies procedures for filing trademark applications for international registrationSimplifies procedures for filing trademark applications for international registration Prescribes that after a trademark is registered in any member country an application of international registration of the same mark may be filed in any other member countryPrescribes that after a trademark is registered in any member country an application of international registration of the same mark may be filed in any other member country The Madrid Protocol was subsequently developed in 1989The Madrid Protocol was subsequently developed in 1989

18 International Filing Strategies The Madrid Protocol An essential instrument in trademark protection worldwide An essential instrument in trademark protection worldwide Administered by the World Intellectual Property Organization (WIPO) Administered by the World Intellectual Property Organization (WIPO) Protects applications or registrations in any member country Protects applications or registrations in any member country Single application filed which may provide protection in member countries Single application filed which may provide protection in member countries Possible to file priority under Paris Convention six-month priority rule Possible to file priority under Paris Convention six-month priority rule Filed through the respective country trademark office for certification Filed through the respective country trademark office for certification Basic application(s) or registration(s) must already be filed with the local trademark officeBasic application(s) or registration(s) must already be filed with the local trademark office Local trademark office submits the application to WIPOLocal trademark office submits the application to WIPO International registration becomes dependent of basic application or registration after five years, sans complications with the latter International registration becomes dependent of basic application or registration after five years, sans complications with the latter International registration is valid for ten (10) years; renewable in ten-year increments International registration is valid for ten (10) years; renewable in ten-year increments Not of much value in Latin America – not adopted by countries Not of much value in Latin America – not adopted by countries

19 Questions & Answers Jose I. Rojas Miami, Florida, USA

20 UFOC Contents ITEM 1 The Franchisor, its Predecessors and Affiliates 2 Business Experience 3 Litigation 4 Bankruptcy 5 Initial Franchise Fee 6 Other Fees 7 Initial Investment 8 Restrictions on Sources of Products and Services 9 Franchisee's Obligations 10 Financing 11 Franchisor's Obligations 12 Territory 13 Trademarks 14 Patents, Copyrights and Proprietary Information 15 Obligation to Participate in the Actual Operation of the Franchise Business 16 Restrictions on What the Franchisee May Sell 17 Renewal, Termination, Transfer and Dispute Resolution 18 Public Figures 19 Earnings Claims 20 List of Outlets 21 Financial Statements 22 Contracts 23 Receipt Exhibits A. Franchise Agreement B. Equipment Lease C. Lease for Premises D. Loan Agreement


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