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Legislations Impacting Franchising Association of Indias Workshop in Mumbai on Legal Issues in Franchising July 12, 2008.

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Presentation on theme: "Legislations Impacting Franchising Association of Indias Workshop in Mumbai on Legal Issues in Franchising July 12, 2008."— Presentation transcript:

1 Legislations Impacting Franchising Association of Indias Workshop in Mumbai on Legal Issues in Franchising July 12, 2008

2 What is Franchising?Evolution of FranchisingModes of Franchising in IndiaLegal Framework for Franchising in IndiaSome Indian Judgments Impacting FranchisingIssues Impacting Franchising & Global Best PracticesFranchising – The Road Ahead in India

3 Perhaps the first answer may well be that Franchising is a method of marketing goods and services. The root word Franchise comes from old French meaning privilege/ freedom. In middle ages a franchise was a privilege/ a right. Essentially a marketing concept, Franchising is an innovative method of distributing goods and services.

4 Few Legal definitions of Franchising exist: 1 st formal legal definition under the Financial Services Act: Franchise is an arrangement under which a person earns profit or income by exploiting a right conferred by the arrangement to use a trade name or design or other intellectual property or the goodwill attached to it. 1 st US franchising legislation of California defines Franchise as a contract/ agreement between 2 or more persons by which, inter alia, the operation of the franchisees business pursuant to such plan or system is substantially associated with the franchisees TM, SM, trade name, logo type, advertising or other commercial symbol designating or its affiliate.

5 Legal definition of Franchise: Blacks Law Dictionary 7 th edition 1999 defines Franchise as, the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area. In India, chapter 5 of the Finance Act defines franchise as an agreement by which the franchisee is granted representational rights to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved…..

6 The concept of Franchising as we know today 1 st started in Germany in 1840 when: Certain major ale brewers granted franchises to certain taverns, granting those taverns the exclusive right to sell their ale. In 1851, Singer Sewing Machine Co. began granting distribution franchises for its sewing machines. Thus began the modern concept of franchising.

7 Evolution of Business Format Franchising The end of the WW II brought onto the economic scene the most dominant form of franchising; the Business Format Franchising (BFF). Elements of BBF include a franchise relationship based upon a formal contract, a successful business format of the franchisor, which is identified with a brand name, TM, SM and/or trade name, formal training to franchisee, support of franchisor in operation of the business, franchisees ownership of business, payment to franchisor, etc. Franchising of foreign brands evolved in India as an unregulated method of introducing foreign brands in India.

8 Some of the franchising models that exist in India: Manufacture-Retailer – Under this model, the franchisee retailer directly sells the franchisors products e.g. Kodak Express, Bose Corp., Wellspun, Shehnaz Hussain. Manufacturer-Wholesaler – Licensed Franchisee, under this model, manufactures & distributes the franchisors products, e.g. bottling of soft drinks Coke & Pepsi.

9 Some of the franchising models that exist in India: Supplier/ Dealer-Retailer – Here the Franchisee retailer purchases products for retail sale from the Franchisor, e.g. lifestyle products, Florista. Retailer-Retailer - Here the franchisor markets a service or a product under a common name and a standardized system, through a network of franchisees, e.g. The Medicine Shoppe, Big Bazaar, Shoppers Stop.

10 India does not have a specific legislation to regulate franchising. Hence, a plethora of legislations govern franchising in India, including: Foreign Exchange Management Act, 1999 – This law regulates all franchising activities involving foreign investments and foreign remittances. The Contract Act, Franchising in India is basically built on the principles of Contract law.

11 Legislations governing franchising Contd.: Intellectual Property Laws including: The Copyright Act, 1957; The Trademark Act, 1999; The Patent Act, 1970; The Geographical Indication of Goods (Registration & Protection) Act, 1999; The Designs Act, 2000; and The Semiconductor Integrated Circuits Layout Design Act, 2000.

12 Legislations governing franchising Contd.: The Monopolies and Restrictive Trade Practices Act, 1969 – This law regulates monopolies and restricts unfair and restrictive trade practices. The Competition Act, This Act will replace the MRTP Act and will regulate competition and fairness in business. The Specific Relief Act, This Act provides specific enforcement for breach of contract by a party.

13 Legislations governing franchising Contd.: Consumer Protection Act, 1986 – Law protecting the consumers. The Sale of Goods Act, 1930; Direct & Indirect Taxation Laws & Cesses; Activity Specific Legislations including: The Prevention of Food Adulteration Act, 1954; The Drug & Cosmetic Act, 1940; The Pharmacy Act, 1948.

14 Legislations governing franchising Contd.: Real Estate Laws including: The Transfer of Property Act, 1882 – law regulating sale, mortgage, lease, gift of immovable property. The Indian Easement Act, 1882 – law regulating the license of immovable property. The Registration Act, 1908 – law regulating the registration of agreements & documents. The Indian Stamp Act, 1899 and State Legislations – law governing the levy of stamp duty. Rent Control Legislation- laws regulating tenancy and letting of immovable property.

15 Legislations governing franchising Contd.: Employment and Welfare Legislations including: The Apprentices Act, 1961; The Child Labour Act, 1986; The Contract Labour Act, 1970; The Employees Provident Funds and Miscellaneous Provisions Act, 1952; The Employee State Insurance Act, 1948; The Employers Liability Act, 1938; The Minimum Wages Act, 1948; The Payment of Bonus Act, 1965;

16 Employment and Welfare Legislations Contd.: The Maternity Benefit Act, 1961; The Payment of Gratuity Act, 1972; The Sales Promotion Employees Act, 1976; The Trade Unions Act, 1926; The Workmans Compensation Act, 1923; The Payment of Wages Act, 1948; Shops and Establishments Act(s); and State acts including The Maharashtra Security Guards (Regulation & Employment Welfare) Act, 1981.

17 Reasonableness of Non-Compete Clause Gujarat Bottling Co. (GBC) & Ors. Vs. Coca Cola Co. & Ors. Agreement signed for grant of franchise by Coca Cola to GBC to manufacture, bottle, sell & distribute various beverages for which TMs were acquired by Coca Cola. Agreements negative stipulation required GBC to work vigorously & diligently to promote & solicit sale of beverages produced under the TMs owned of Coca Cola Co. Shares of GCB were transferred to Pepsi, a rival of Coca Cola. Coca Cola obtained an order of injunction from High Court restraining the transfer of shares from GBC to Pepsi.

18 Protection of Confidential Information V.V. Sivaram & Ors. Vs. Foseco India Ltd. (FIL) Defendants 1 & 2, were ex-employees of FIL & had access to confidential & detailed info. about Turbostop (T), a patented product of FIL; FIL bound them with contractual obligation of non-use of confidential info. acquired in course of employment & by a non-compete obligation; Defendant 3, a contractor of FIL had access to confidential info. about T & was bound by a confidentiality & non- compete contract. All 3 violated contractual obligations. Court granted order of temporary injunction against them.

19 Breach of Consumer Rights by Franchisor: MacDonalds (Mac) French Fries Case in USA: A class action lawsuit brought against Mac by group of hindus, vegetarians & kosher observers from USA. During 1990, Mac advised its vegetarian customers that its French Fries contained no meat but in 1997, shortly after Wendys was sued for allegedly misrepresenting its food as veg., Mac reversed its stance & began advising public that its fries actually contained a beef product: beef tallow. The court ordered Mac to pay damages of 10 Million US$ and was also asked to issue an apology.

20 Food Adulteration Issues i.e.: In Fruit Juices & Beverages; In Milk & Dairy Products; In Cooking Oil & Food Products. Consumer Rights & Product Liability Fitness of Products; Packing, Storage & Quality Issues; Complacency of Franchisor - MacDonald's French Fries; Non-adherence to Standards.

21 Some Global Best Practices include: Standard Operating Procedures Covering all aspects of business including logistics, storage, display, preparation & serving food, hygiene, packing, etc. Staff Training Quality Checks Surprise Audits Customer Feedback Care for the Environment

22 Indias vast geographical spread, diversity, growing economy, purchase power, young population & acceptance of western concepts are huge enablers for franchising. Growth sectors include reality, food & beverages, hospitality, health & fitness, tourism, education, etc. For the last several years, franchising is growing in India at a steady rate of 25-30%. Established brands like Pizza Hut, MacDonalds, Kodak, Crossword, KFC, Subway are consolidating.


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