Featured notes of the relationship between Vietnam law on franchise and intellectual property, Vietnam franchise law, franchise law in Vietnam, Vietnam franchise, Franchise in Vietnam, franchise agreement in Vietnam, Vietnam franchise agreement, franchise and IP in Vietnam, Intellectual property in Vietnam, Intellectual property law in Vietnam, intellectual property

Featured notes of the relationship between Vietnam law on franchise and intellectual property

Abstract

Alongside the development of the franchise in Vietnam for the past 20 years, the legal frame regulating these activities has been established and improved day by day. Originated as the spine of the law on intellectual property in terms of the commercial law, the law on franchise and the law on intellectual property have a close-knit, interplay relationship. However, intellectual property’s regulations in franchise activities generally still in a developing state, several suitable regulations are still lacking, or there are conflicts and overlaps among regulation; not to mention the most vital factor is the nature of the franchise activities. This is one of the major reasons that leads to inefficient results of Vietnam franchise activities as well as confusion in resolving conflicts in Franchise Agreements that are related to intellectual property rights. Therefore, the current trend of franchise development requires the assessment of the relationship between the law on franchise and the law on intellectual property as a whole to revise, amend, complete related regulations, assuring the ability to stably grow of the franchise activities in Vietnam.

Keywords: Vietnam Franchise, intellectual property law, Commercial Law, law on intellectual property

I. RATIONALE:

Franchise is a business model that is developed in many countries, especially the developed countries counting from the 50s after the World War II. Nowadays, franchising has been becoming one of the most lucrative services, focusing many fields of businesses like drinks, fast food, education, fashion, real estate,… with many prime example franchise such as KFC, McDonald’s, Qualitea, Starbuck Café, Lotteria, Jollibee, Aptech… In Vietnam, this model only exists and develops in 20 years, especially after Vietnam become WTO’s member.

Franchise is related to many other fields such as: the law on intellectual property, the law on competition… The law on franchise itself was formed base on the combination of many regulations that are related to many subjects of the intellectual property law. Therefore, revising the legal relationship in franchise will cause many changes in many different regulations that belong to different fields. The law on franchise and the law on intellectual property have a strong impact on the legal relationship in terms of franchise. How are franchise and intellectual property related? And how far are they really compatible with each other? This article will analyze the highlights in the relationship and assess their positives as well as limitations in revising the legal relationship in terms of franchise. By doing so, the authors deliver several suggestions in order to further complete the legal frame for franchise activities, especially the activities relating to intellectual property rights.

II. AN OVERVIEW OF THE LAW ON FRIANCHISE AND THE LAW ON INTELLECTUAL PROPERTY IN VIETNAM:

1. Definitions

1.1. Franchise

The Article no.284 of the Vietnam Commercial Law 2005 regulates: “Commercial franchise means a commercial activity whereby franchisors permit and require franchisees to undertake by themselves to purchase or sell goods or provide services on the following conditions:

1. The purchase or sale of goods or provision of services shall be conducted in accordance with methods of business organization prescribed by franchisors and associated with the franchisors’ trademarks, trade names, business knows-how, business slogans, business logos and advertisements.

2. Franchisors shall be entitled to supervise and assist franchisees in conducting their business activities.”

Therefore, franchise can be understand as a mean of goods and services distribution, in which franchisees paid the franchisors in order to be allowed to do bussiness exclusively by using trademarks, tradenames, signatures, technologíe, Commercial instructions, as well as trade secrets, methodology…. of the franchisors, under the strict guidance, support and regular quality control from the franchisors. In franchise activities, the franchisors can allow multiple franchisees to use franchisors’ “bussiness rights” in the same time. Through that, franchisors are able to build a huge network, goods and services distribution systems; and therefore, maximizes their profit.

Franchising is the commercial activity that carries the characteristics, combinations of several other commercial activities, especially the relationship between technology transfering, intellectual property licensing and commercial distributing. However, franchise also carries unique characteristics, has further requirements than other activities such as:

– The franchise’s subject is “commercial rights”, in which includes but not limited to intellectual property rights, which is the subject of the technology licensing/ transfering;

– There is always the control from the franchisors and the franchisees must obey the regulations of the franchise model;

– The franchisees is seperated to the franchisors;

– The consistency and systematic nature of the franchise relationship.

1.2. Franchise Agreements

In Vietnam law, there is no definition for the Franchise Agreements (FA). The title “Commercial Franchise Contract” of the article no.285 of the Vietnam Commercial Law 2005 only regulates the form of this contract. Legally speaking, FA can be reffered as a type of contract which is signed by bussiness men during franchise activities. Therefore, this contract must include general characteristics of a contract regulated in Chapter VI of the Vietnam Civil Code 2005. Accordingly, FA must fulfill the civil legal requirements for a civil transaction.Yet, overall, FA is an agreement betweenn franchisors and franchisees about the performing rights and obligations relating to franchise activities. Basically, FA shows the nature of the franchise transactions as regulated in article no.284 of the Vietnam Commercial Law 2005.

Franchise Agreements also are identical to many other regular contracts; are the agreement between parties in franchise relationship that arises, changes, terminates rights and obligations of parties involved in the franchise activities; and are the bases to resolve possible conflicts between parties during the process of performing the contracts.

2. Legal Systems governing Franchise activities:

The law gorverning Franchise Activities are system of rules that promulgated or recognized by the State in order to regulate social relationship arising in the process of signing and performing Commercial Franchise Contract. This is a very important legal basis to resolve conflicts arising in the franchise activities.

Vietnam has issued legal documents related to franchise as follows:

– Vietnam Commercial Law 2005: Regulates the most basic matters relating to franchise activities at Section 8, specifically as follow: regulates the definition of franchising (Article 284), Commercial Franchise Contract (Artivle 285), Rights and Obligations of the Franchisors (Article 285, 286), Rights and Obligations of the Franchisees (Article 287, 288), Sub-franchise to a third party (Article 289), Registration of commercial franchises (Article 290)…

– Vietnam Civil Code 2005

– The Decree no 35/2006/NĐ-CP of the government in 31/03/2006 specifically regulates the Vietnam Commercial Law about franchising: This Decree has 3 chapters, 28 articles providing specification and guidance the Section 8 of the Vietnam Commercial Law (2005), mentioning a more in-depth legal matters about Commercial Franchise Contract such as form, entities, contents, subjects, terms of the contract, specifically: Powers to perform the state management of franchising (Article 4), Conditions for the Franchisors and Franchisees (Article 5, 6), Goods and services permitted for franchising business (Article 7), The franchisor’s, franchisees’ responsibility to supply information (Article 8, 9), Industrial property subject matters in franchising (Article 10), Contents of the franchising contract (Article 11),… Valid term of the franchising contract (Article 13), Transfer of commercial rights (Article 15), Registration of franchising (Article 17), Decentralization of responsibility to register franchising (Article 18), Dossiers of application and Procedures for registering franchising (Article 19, 20), Acts of law violation in franchising (Article 24)…

Besides, contents of franchise contract include terms relating to matter such as the industrial property subject in franchise as well as agreements relating to reducing competition between entities, these contents are regulated in specialized legal documents such as: Law on intellectual property 2005, amended 2019 and related legal documents, Law on Competition 2004, Law on Technology Transfer 2006…

III. FEATURED NOTES OF THE RELATIONSHIP BETWEEN VIETNAM LAW ON FRANCHISE AND INTELLECTUALPROPERTY

1. Vietnam Law on franchise and Law on intellectual property support each other in regulating subject of the Franchise Agreements

The subject of Franchise Agreements is “commercial rights” that franchisors allow the franchisees to use in bussiness. As regulated at Clause 6, Article 3 of the Decree 35/2016/NĐ-CP, “commercial rights” are rights granted to the franchisee by the franchisor that also requests the franchisee to undertake by itself the business of supplying goods or providing services within a system set up by the franchisor and associated with the franchisor’s trademark, trade name, business slogan, business and advertising logo;

In franchie, franchisors aim at controlling and operating the bussiness systems, procedures of managing, operating series of facilities in bussiness, bussiness policies, standard designs of bussiness, restaurant… and in which,  industrial property rights (trademarks, industrial designs, patents, trade secrets…), copyrights (operating manuals, procedure documents…) play a vital role. That Franchise Agreements have regulations relating to franchise’s subjects which is industrial property rights has further made the Franchise Agreements rigid.

According to Article 10 of the Decree 35/2006/NĐ-CP, transfering the rights to use industrial property subject can be regulated into a sperate part in the Franchise Agreements and subjected to Law on Intellectual Property, in which the Law on Intellectual Property is the fundamental legal documents to this revision.

The Clause 4, Article 287 of the Vietnam Commercial Law 2005 also regulates that franchisors are obligated to ensure intellectual property to the subjects in the contracts. By signing the frachise contract, franchisors will provide the franchisees unexclusive rights to use intellectual property subjects and guide the franchisees to use the subjects accordingly. In order to provide these rights, the franchisors guarantee the intellectual property rights over objects stated in Franchise Agreements. The franchisors also have to commit to equally treat all franchisees in the commercial franchise system; which prevents the losses and risks for franchisees in case there is conflicts with a third-party about the subjects. The trademarks licensing is non-exclusive and therefore franchisors are able to (1) use, franchise and license marks to another party; (2) establish, develop and franchise systems that are different to the systems licensed to the franchisees, without having to provide franchisees any rights according to those systems; and (3) change, make amend to the system, either partly or as a whole, as long as there is no serious losses of franchisees’ rights. Any and all reputation arising from the trademarks usage by franchisees is unique and exclusively profits the franchisors when the contract’s term ends, the franchisors will not pay the franchisees for any reputation that the franchisees contributed while using the franchised systems or trademarks.

Furthermore, goods, services bearing the franchisors’ mark provided to customers must be in assurance of quality consistency. Franchisors, as owners of the mark, must be responsible for protecting and assuring the quality of the goods or services bearing the mark. Franchisors must actively observe the marks to ensure that the level of quality is maintained by the franchisees. The rigdly drafted franchise contract shall specifically regulate the franchisees’s obligations regarding the marks. Franchisors have the right to examine and observe the goods and services bearing the marks. Other than that, franchisors need to provide franchisees guidances for the trademarks and guidances for level of quality as well as the consistency of the goods and services that need maintained.

As for the franchisors, their obligations to intellectual properties are specifically regulated at Clause 4 and 5 of Article 289, Vietnam Commercial Law 2005:

– Non-disclosure obligations relating the franchised know-how even after the expiration or termination of Franchise Agreements: This is not only franchisors’ obligation but also is the franchisees’. Franchisors would want to keep secret as they want to protect their intellectual property from competitors; franchisees would want to keep secret as their success depends greatly on the success of the whole franchise system. Franchise contract shall regulate clearly which information need to be confidential, what methods to keep the information confidential and the franchisees’ responsibility in case they fail to do so. Though the priority should be different for each franchisors, all franchise activities consider accountant, technology, strcuture, marketing, design, distribution, formula, bussiness plan, manual documents and validating technique are candidates to be secured. One part of the manual must clarify all the information that the franchisors consider confidential and regulate the usage as well as security when licensing to franchisees. Security obligation also is one part of the franchisors’ training program, in which franchisors explain legal obligations and responsibilities to keep all information confidential to all franchisees’ employees. Franchisees confirm that all the information included in the manual and other documents are confidential assets and franchisees will do their best to keep the afore-mentioned information as confidential.

Trade secrets and know-how must be utmost confidential, suitable to the regular referencing requests from the franchisees. Franchisees shall strictly limit the documents availability, only those employees who has suitable and cleared intent and really in need of referring to the documents in order to carry out the work accordingly to their position and strictly follow any regulation in the documents regarding maintaining, storaging and using confidential documents. Employees who are allowed to assess the franchisors’ confidential onformation shall be notified about their legal obligations and responsibilities in keeping the information secured. According to the requirement from franchisors, franchisees also need to assure that managers and employees will sign a commitment form according to franchisors’ form not to reveal to a third party any confidential data or knowledge relating to bussiness, trademarks or systems provided or made known to the managers or employees.

Besides, franchisees must not reveal, use or let another use, either directly or indirectly, confidential information or knowledge relating to system for personal or another’s interest at anytime without approval by document from franchisors neither before nor after the termination of the franchise contract. Furthermore, should there is no approval by document from franchisors, franchisees will not copy, record, or duplicate any part the confidential documents by any mean and will not let unauthorized personel to assess the afore-mention documents.

To stop using trademarks, trade names, business slogans, logos and other intellectual property rights (if any) or systems of franchisors upon the expiration or termination of Franchise Agreements: This regulation assures that franchisors are always able to protect the system, avoiding the risk whereas franchisees or their employees use knowledge gained from franchisors to operate seperate bussiness, at the same time avoiding the risk whereas multiple franchisees compete with each other. This also is one of the prime regulation for terminating franchise contract when comparing with other contracts.

However, other than showing a close-knit relationship between intellectual property rights and franchising, the regulations at Article 10 of the Decree 35/2006/NĐ-CP also creates avoidable complexities relating to industrial properties in Franchise Agreements. The complexities can be first seen in the Law on Industrial Property, mostly regulate exclusively the relationship regarding ordinary industrial property subjects and seperated industrial property subjects. Should this be applied to “commercial rights” in franchise relationship, it will be unsuitable as franchise activities possess unique basic characteristics that allow contract entities sometimes avoid the rigid regulations about intellectual property.

Prime example such as legal nature of franchise allows the franchising of “commercial rights” in which includes trade names, so that franchisors and franchisees can co-operate the business with that trade name; however, this is not possible in the Law on Intellectual Property as “trade name” are not a subject to be transferred the right to use (Clause 1 Article 142, Vietnam Law on Intellectual Property) or must be transferred alongside all business facilities and operations under that trade name (Clause 3 Article 139, Vietnam Law on Intellectual Property). Besides, Vietnam Law on Intellectual Property (2005) only mention the protection each contributing factor separately of “commercial rights” such as trade name or goods or services trademarks. Meanwhile, in franchise activities, the combination of intellectual properties of franchisors requires to be protect altogether, even one change in one contributing factor can lead to the change of “commercial rights”. “Commercial rights” contributors in franchising are not limited to subjects regulated in Law on Intellectual Property such as trade name, trademarks, patents, industrial designs, trade secrets… but further include subjects unprotected by Law on Intellectual Property, such as: business slogans, store’s decorations.

2. The interplay between Vietnam law on franchising and law on intellectual property in the provisions of the franchisors’ control over the franchisees

Franchising is the practice of many organizations conducting business with a unified name and method. Therefore, the requirement of this activity is to ensure the uniformity of elements related to business processes such as consistency in the quality of goods, services, service methods, basic layout of business department. In order to do that, the franchisors always requires the franchisees to be obligated to comply with the franchisors’ business model, to apply all the expertise of the franchisors such as: the right to enforce standard arrangements at the sales locations; Advertising and trade promotion activities in the locality must follow the direction of the franchisors in order to create a unified and synchronous business model. The franchisors has control over the franchisees’ compliance with the franchise model. Controlling compliance with the franchise model is a franchisors’ right and responsibility. The franchisors may periodically or irregularly inspect the franchisees’ exercise of commercial rights. This feature represents the difference between franchising and technology transfer. In franchising, this is an important and indispensable activity to ensure the consistency of the whole system, while in technology transfe, in principle, after the transfer is complete, the licensor will shall have no control over the activities of the franchisees.

In franchising activities, in order to have good control over the franchise system, the franchisors often sets out agreements related to the supply of raw materials, products and services as well as the cost of raw materials. The agreement of the parties in the franchising relationship on the supply of raw materials to form the product is considered reasonable within the scope of the franchise, ensuring the uniformity of product quality in the same franchise system, helping the franchise system define the uniqueness of the business model for consumers. However, this may lead to the franchisors’ abuse of power in placing imposition and control on the franchisees, limiting competition in the market.

The law on franchising has no specific provisions limiting the franchisors’ rights in relation to the above content. However, as analyzed above, intellectual property rights are an important part of the “commercial rights” of franchising. Therefore, from a certain perspective, a franchise contract can be understood as a license contract for the right to use an industrial property object, an “extended” technology transfer contract. Therefore, according to the provisions of article 10, Decree 35/2006/ND-CP, the provisions related to the permission to use industrial property objects in the franchise contract will be governed by the IP law.

Pursuant to Clause 2, Article 44 of the Law on Intellectual Property 2005, the agreements made by the franchisors shall not contain provisions that unreasonably restrict the rights of the franchisees, especially provisions not derived from the right of the franchisors such as forcing the franchisees to purchase all or a certain percentage of the materials, components or equipment from the franchisors or from a third party designated by the franchisors for no purpose to ensure the quality of goods and services produced or provided by the franchisees. However, it should be noted that, according to Clause 1, Article 284 of the Commercial Law 2005, it is stipulated: “The purchase and sale of goods and provision of services shall be carried out in the manner of business organization prescribed by the franchisors…” Therefore, if in a technology transfer contract, the receiver will have the right to improve and develop the transferred technology without having to notify the transferor, or, in the license contract, it will not be a restrictive clause “Prohibit the licensee from improving industrial property objects, except for trademarks; oblige the licensee to transfer to the licensor free of charge the industrial property object improvements created by the licensee or the right to register industrial property or industrial property rights for such improvements (Clause a, point 2, article 44 of the IP Law 2005), in franchising, the franchisees does not have the right to bring any improvement or development into its business nor to change the business method without the consent of the franchisors because doing so will lose the consistency of the system and adversely affecting the whole system.

3. Along with the Vietnam law on franchising, intellectual property law plays an important role in handling disputes over Franchise Agreements related to intellectual property.

Franchise relationships always have potential conflicts and conflicts of interest. Franchise contract disputes often have a property element, are attached to the rights and interests of the disputing parties and arise directly from the contractual relationship, so the parties always have the right to self-determination and settlement on the principle of equality and agreement. The content of disputes related to Franchise Agreements is often closely related to commercial rights, especially intellectual property rights. Disputes related to intellectual property and competition make the resolution of franchise contract disputes even more complicated. This complexity is not limited to the application of the law, but also to the complexity of choosing a form of dispute resolution.

Commercial Law 2005 and Decree 35/2006/ND-CP do not have any direct provisions on disputes over Franchise Agreements, especially disputes over contract content on intellectual property rights as well as dispute resolution methods. However, through the provisions of Clause 1, Article 16 of Decree No. 35/2006/ND-CP, the franchisees has the right to unilaterally terminate the franchise contract in case the franchisors violates the obligations specified in Clause 1 of Article 287 of the Commercial Law. Including the obligation to secure the intellectual property rights to the object stated in the franchise contract.

We can clearly see that disputes related to intellectual property rights are always potential problems in the process of contract performance by the parties. In addition, many disputes arise from the franchisors’ acts or omissions that adversely affect or destroy the trademarks, services or reputation of such goods or services trademarks, or violate the confidentiality provisions of the contract, and/or, the Franchisees commits acts of violating the provisions of the franchisors’ use of intellectual property objects, including disclosing or authorizing or leaving the disclosure of operating manuals and other confidential information contrary to the terms of this contract, in violation of the anticompetitive provisions of the Franchise Agreements.

Disputes over commercial franchising contracts are essentially commercial disputes. They could be resolved in accordance with the provisions of Chapter VII – Sanctions in commerce and resolution of disputes in commerce of the 2005 Commercial Law. Thus, the forms of commercial dispute resolution are the main forms of dispute resolution of Franchise Agreements, including: (1) Negotiation; (2) Mediation; (3) Commercial arbitration; and (4) jurisdiction of the Court. However, due to the complex nature of disputes in many fields, it is difficult to fully comply with the above-mentioned forms of commercial dispute resolution. According to the provisions of Clause 2, Article 200 of the 2005 IP Law and Articles 26 and 30 of the 2015 Code of Civil Procedure, disputes over contracts related to intellectual property will fall under the jurisdiction of the Court. Therefore, whether it is possible to conduct commercial arbitration to resolve a franchise contract dispute entirely related to intellectual property rights at commercial arbitration is a big question for the law as well as law enforcement in Vietnam today. In fact, the franchising contract dispute relating IP will be resolved in Abritration in case there is article concerning this form of commercial dispute resolution.

III. CONCLUSION

From the above analysis, it can be seen that the Vietnam law on franchising and the law on intellectual property are quite compatible in regulating the legal relationship of franchising. However, there are still many points of inconsistency, not synchronized, causing unnecessary obstacles. Therefore, the amendment of the Intellectual Property Law, which contains detailed regulations on franchising activities, is very practical. The law on intellectual property should have provisions to comprehensively protect the franchisors’ “commercial rights” in franchising activities. In other words, “commercial rights” with its constituent elements such as trade names, trademarks, service marks, trade logos, business secrets, etc., must be protected in a unified way. Furthermore, legislators should also consider including provisions in the Intellectual Property Law to protect the franchisors’ special creations when constructing franchise facilities, such as franchise store system, business organization, store layout, etc. The prohibition of industrial property object owners from transferring trade names must also include exceptions for the franchisors in relation to the franchisees in order to avoid distorting the relationship between the parties in the contract or to avoid improper application of the law to the principles of the law. Likewise, the provisions on prohibiting the owner of an industrial property object from restricting certain rights in the business activities of an industrial property object user should also have an exception to the relation between franchisors and franchisees in franchising activities. In addition, the law also needs to provide more open regulations on dispute resolution methods for Franchise Agreements in order to help subjects find a quicker, more effective and appropriate solution in the process of dispute resolution. The completion and synchronization of legal provisions on franchising and intellectual property will contribute significantly to attracting parties to franchising activities, promoting the development of the franchise model as well as promoting its role and effects on the country’s economy.

Lawyer Nguyen Thuy Chung, Partner of ASL LAW

ASL LAW is the top tier franchise law firm in Vietnam. If you need any legal advice on franchise in Vietnam, you could contact us.

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