Franchising and Licensing: A Successful Way to Do Business in India
Franchise rightly claims to be the wave of future business in India. A huge consumer base of over a billion people, including a burgeoning class of urban consumers who have substantial disposable incomes with quality and brand awareness, coupled with the attractiveness of the Indian economy in terms of its human resources, has been essential to attract foreign companies to the country. Although the franchise business in India has seen an impressive growth of around 30-35% in the last 4-5 years with an estimated annual turnover of US$4 billion, this is a mere fraction of the potential that India can to offer. The Indian Franchise Association estimates that in the next five years there will be at least 50,000 franchises in the Indian market.
Franchising is a way of doing business and involves the use by one person (“Franchisee”), pursuant to a license, of another person’s (“Franchisor”) business model, name, likeness, image and business identity in conjunction with with your confidential information. know-how to exploit its intangible assets in a particular territory during a specific period with or without guaranteed financial returns for the Franchisor.
A typical franchise agreement provides the franchisor with the benefit of the franchisee’s knowledge of the territory; access to local sales channels and marketing expertise; minimum capital outlay; minimal government approvals; fewer personal problems; accelerated network growth and, probably, profitability.
There are three different models of franchises: Product distribution franchises that involve a cooperation for the distribution of goods, mainly in retail businesses; Trade name franchise where the franchisee uses the franchisor’s trademark/trade name to sell its own products or services and business format franchise, a combination of the other two franchise types, using the franchisor’s trademark/trade name to distribute the goods or services of the franchisor. Today, Business Format is a preferred model with over 1,150 domestic and international franchise systems in India.
LEGAL FRAMEWORK
India does not have a specific consolidated franchise legislation. Some key laws affecting franchising in India include the Indian Contracts Act of 1872, the Competition Act of 2002, the Trade Marks Act of 1999, the Copyright Act of 1957, the Protection of 1986 Consumer, Labor Laws, Tax Laws and the Foreign Exchange Administration Act, 1999. Important contractual and legal issues that may affect a potential franchise relationship are:
(a) Execution of the non-competition agreement. An important issue that arises in this regard is the non-compete obligation of the franchisee, either during the franchise relationship or after the termination of the relationship. A non-compete obligation falls within the purview of trade restriction under the Indian Contracts Act, 1872.
Under Indian law, a contract that restrains trade is unenforceable unless (i) it is reasonable between the parties; and (ii) is compatible with the public interest. While non-compete during the franchise relationship is generally enforceable, post-termination negative non-compete covenants that restrict the franchisee from entering into similar agreements for similar goods and services are generally considered unenforceable unless it passes the test of reasonableness. .
(b) Payment Terms and Taxes. Remittances to a foreign entity are regulated by the Foreign Exchange Management Act of 1999 and the Regulations made thereunder. An Indian franchisee can remit royalties to the trademark license or know-how without any restriction on the percentage or duration of royalty payments.
The payment made to the Franchisor is subject to a withholding tax obligation of 10% of the total royalty or fee in terms of the Agreement to Avoid Double Taxation between India and Germany. Services provided by a franchisor to a franchisee would also be subject to a service tax in India of 10.30% of the gross fee payable to the franchisor. When the franchisor is a foreign entity, the recipient of the service in India is treated as the service provider for payment of the service tax.
(c) Duration, Renewal and Termination. Under Indian laws, all agreements entered into between private parties are terminable in nature, irrespective of the never-ending nature of the agreement. However, immediate termination of a contract without giving any reason may expose the breaching party to a claim for damages for wrongful termination.
Therefore, it is advisable for the franchisor to negotiate a fixed-term contract (rather than an indefinite term) with appropriate termination clauses for convenience and with a maximum cap on liability for damages under the contract.
(d) Agency Matters. It is also best to avoid the principal-agent relationship between the Franchisor and the Franchisee to avoid tortious liability for damages resulting from the negligence of third parties.
(e) Post-Termination Matters. Some issues giving rise to disputes that are adequately protected under existing Indian laws include the misuse and possible infringement of intellectual property rights and confidential information following the termination of the franchise relationship. Post-termination inventory management should also be addressed to enable the franchisee to successfully manage unsold inventory/raw materials.
(f) Governing Laws and Implementation of Laws. Jurisdictional difficulties often deter parties from taking legal action against the breach. Therefore, it is necessary to provide clarity on the applicable law and jurisdiction for the adjudication of disputes under international franchise agreements (which may be a neutral foreign forum). The Indian courts recognize that “the chosen court may be a court in the country of one or both parties, and may be a neutral forum…”.
(g) Consumer Protection and Anti-Competition. Indian consumer protection laws allow a consumer to lodge complaints with consumer forums for faulty or substandard goods or services provided by the franchisee. Similarly, restrictive or anti-competitive business practices promoted by the franchise agreement can be challenged under the Competition Law.
LICENSES AND USE OF INTELLECTUAL PROPERTY RIGHTS
The manner of use of intellectual property rights (“IPR”) and its protection against misuse is one of the most important concerns of the Franchisor. Issues related to the scope (including geographic) of the trademark license, exclusivity of use, scope of transfer of know-how, misuse/unauthorized use and consequential damages caused to the trademark are some of the important aspects that a license agreement should address. .
India already has a lot of laws related to IPRs including Trademarks Act, Copyrights Act, Patents Act, etc. which provide extensive protection and enforcement of IPRs. . These include permanent and mandatory injunctions against infringement and usurpation. India is also a signatory to international conventions on intellectual property rights, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which provides protection for trademarks, copyrights, service marks and the designs of the foreign franchisor. IPR laws have also been amended to comply with exclusive rights obligations under TRIPS and consequently Indian laws meet international standards for IPR protection. Indian courts are also proactive in pursuing infringement actions.
Where the trademark is a registered trademark of the franchisor and such trademark is intended to be used by the franchisee in India, it is recommended to register the franchisee as a registered user of the same to enable the franchisor to freely claim the benefit of the use of the trademark. Commercial brand. through the franchisee. In addition, under the trademark laws, the scope of the term “permitted user” has been expanded by allowing unregistered users of a registered trademark with the written consent of the registered owner to come within the scope of such term and such use increased to the benefit of the owner (Franchisor).
In case of improper use of the mark by a third party, the Franchisor and the Franchisee may bring a joint action and in cases where the Franchisee is a registered user of the mark, it may bring an action in its own right. Post-termination agreements for the protection of the vested intellectual property of the franchisor remain applicable even after the termination of the franchise agreement.
conclusion
India, a multi-ethnic country with the second largest business population in the world having sufficient exposure to the international standard of services with a healthy business law environment, is poised to grow phenomenally in the franchise sector in the coming years.