Franchising in China and its Legal Implications

1. Franchising in China and its Legal Implications BY LUYU 2010.10 Email:chloe_lulu@hotmail,com

2. Contents 1 1 1 1 What is franchising? 2 2 2 2 2 Franchising in China Franchising in China 3 3 Relevant regulations 3 3 4 Legal disputes and resolutions 4 4 4

3. What is franchising? 1

4. Introduction • Franchising is the practice of using another firm's successful business model. • For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. • For the franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

5. QUESTION 1 • It will also be seen from the names of the franchise that which country is a leader in franchising innovations, a position it has held since when when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression. (the US ) (the 1930s)

6. QUESTION 2 • Franchising has grown rapidly in Europe in recent years. The Loi Doubin of 1989 of which country？was the first European Franchise Disclosure law in Europe (France)

7. Franchising in China 2

8. If I do not join a brand, I could not get profit

9. Introduction • China has the most franchises in the world but the scale of their operations is relatively small. • Each system in China has an average of 43 outlets, compared to more than 540 in the United States. • Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant foreign entry in 1987 and is widespread. But total franchising is only 3% of retail trade which is hungry for foreign franchise growth.

10. Automotive Hotels & Motels Business Services Maintenance Children's Products & Services Personal-Care Businesses Education Recreation Financial Services Retail Food Service Businesses Health Care Tech Businesses Home-Improvement 。。。。。。。

13. Franchise in China---Up to 2010.8.30

14. Development of the franchise market in China • In the early 90’s Franchising was only introduced to China • In 1997 China’s Ministry of Internal Trade promulgated the Administration of Commercial Franchise Procedures representing the first set of regulations directed at specifically addressing issues pertaining to the franchise sector. • In 2004 as part of China’s accession into the World Trade Organization (WTO) and commitment to the principles therein, the Ministry of Commerce issued the Measures for the Administration of Franchise Operations (“Franchise Measures”) effective February 1st, 2005. • In 2007 Three new regulations promulgated by MOFCOM

15. Relevant regulations 3

16. Current Legal Framework and Franchising Structures in China Information disclosure measures(2007) Franchising Structures Archival filing measures(2007) Franchising regulations(2007)

17. 1.Definition---upon Chinese law Franchisor must have registered trademark, patent, logo, know-how, resource of enterprises. Franchisee shall pay the expenses to the franchisor. Elements Franchisee shall be under the unified management business mode There is a contractual relationship between the franchisor and franchisee.

18. 2. Qualifications and the Two-Plus-One Rule

19. QUESTION 3 • Among the franchisor obligations are: • 1、The franchisor (or its subsidiary) must have operated at least operated how many？(two )company-owned franchises in China (revised to anywhere) for more than 12 months so-called "the two-store, one-year” rule

20. 3. Filing Requirements • Within 15 days from executing the first franchise agreement, the franchisor must file with MOFCOM • i) if the franchising activities take place within a single province, autonomous region or municipality under the central government (Beijing, Shanghai, and other major cities), then with the MOFCOM of that province, autonomous region or municipality under the central government; • or ii) if franchising activities take place in more than one province, autonomous region or municipality, then at the national level MOFCOM.

21. Thereafter, the relevant MOFCOM will have 10 days to properly file all completed filings, and publish them on its website. Chinese commerce ministry's website ↓

23. 4. Disclosure of Information • The following materials must be provided to the prospective franchisee a minimum of 30 days prior to the signing of the Franchise Agreement: • 1. Basic information on the franchisor and franchise activities  • 2. Basic information on the business resources of the franchisor • 3. Basic information on franchise expenses: • 4. Information on the prices and conditions of the products, services and equipment provided to the franchisee. • 5. Information on the continuous provision of services to the franchisee. • 6. Methods and content of guidance and supervision over the franchise activities of the franchisee: • 7. Information on the investment budget of the franchise:The expenditure for the investment budget may include the following: initial fee; training fee; real estate and decoration fee, procurement fee for equipment, office supplies…. • 8. Information on franchisees within China: • 9. Abstracts of the franchisor's financial and accounting reports and of the audit reports in the last two years audited by the accounting or auditing firms. • 10. Information on any major litigation or arbitration involving any franchises of the franchisor in the last five years. • 11. Information on any record of major illegal operations of the franchisor and its legal representative. • 12. Franchise Contract • ……

24. QUESTION 4 2、the franchisor must disclosure any information requested byWHO？ （ the franchisee ）

25. QUESTION 5 • The Disclosure has to take place how many days in advance. (20)

26. Franchise Agreement The Franchise Regulations require certain clauses be provided in the relevant franchise agreement: • 1. basic information on the franchisor and franchisee; • 2. content and term of the franchise; • 3. types, amounts and payments of franchise fees; • 4. specific content and manner of provision of operational guidance, business training, technical and other services to franchisee; • 5. quality standards, quality control measures for the provision of products and services by franchise operations; • 6. promotions and advertisements of products and services of franchise operations; • 7. arrangements for consumer rights, and assignment of liability in franchise operations; • 8. amendment, rescission and termination of the franchise agreement; • 9. liability for breach; • 10. dispute resolution; • 11. other matters as agreed upon between the franchisor and franchisee.

27. QUESTION 6 • The Franchise Regulations require the franchise agreement must have how many yearsterm (a minimum three-year)

28. Other elements of this agrement are: • confidentiality obligations：the franchisee’s confidentiality obligations continue indefinitely after termination or expiration of the franchise agreement • deposit term：if the franchisee has paid a deposit to the franchisor, it must be refunded on termination of the franchise agreement • franchisor’s marks：upon termination, the franchisee is prohibited from continuing to use the franchisor’s marks

29. Legal disputes and resolutions 4

30. You should pay the management fee! What? I don’t understand why you ask me to pay this and this and this…..who told me should pay it? Dispute 1

31. We sent the manager to your store! And you should pay it! Pay it? What did your manager do for us? Dispute 2

32. Now you should pay for franchising In fact, I get nothing from franchising, and I am bankrupt because of you! Now you should give me compensation! Dispute 3

33. Tips • A good contract is best protection • Know your rights and protect your rights not only from contract but also from law • Record and Prepare the evidences, proofs ,and you can send official letter to the opposite and preserve the proofs • Take legal actions as soon as possibly

34. How to solve the disputes? How? Negotiations resolutions arbitration lawsuit

35. Conclusion • China represents a tremendous opportunity for international franchise operations. • Although there are numerous challenges and complexities in establishment and operations, the recent legal changes have largely liberalized the franchising market for foreign investors. In combination with the current rates of economic growth, the timing is ideal for foreign franchisors to explore opportunities in the Chinese market.

36. Thank You ! Contact: chloe_lulu@hotmail.com