EXPERIENCE IN FRANCHISE OPERATIONS, PERSPECTIVES FROM THE FRANCHISOR - OTIS LAWYERS

With many outstanding advantages, franchising is a preferred and increasingly popular form of commercial activity. When engaging in a franchise relationship, if the franchisor has the ability to expand business operations and increase the brand's popularity, then the franchisee has the opportunity to sell products that are already reputable in the market, thus making it easier to attract customers and seek profits. Franchisors hoping to expand their business will expect franchisees to provide consistency and coherence in their operations for their brand, while also protecting transferred or assigned commercial rights such as trademarks or trade secrets. Through practical experience advising businesses participating in franchise transactions, OTIS LAWYERS will provide some legal considerations for franchisors when engaging in franchise relationships.

Conditions regarding subjects and forms of franchise contracts

Subjects in the franchise relationship

In the preparation stage for establishing a franchise relationship, the franchisor needs to verify their own conditions as well as those of the franchisee to ensure that the franchise meets all the subject conditions.

For the franchisor, according to the regulations of Decree 35/2006/ND-CP as amended and supplemented by Decree 08/2018/ND-CP, the business system that the franchisor intends to franchise must have been operating for at least 01 year. The franchisor should note that this condition applies to the business system, not to individual traders. For example, if a foreign-invested enterprise operating in the retail sector has been established for more than 01 year, but the time when this enterprise was granted a business registration certificate and a retail establishment license for the first retail establishment falls short of 01 year from the intended franchise date, the business system of this enterprise still does not meet the franchise requirements. Or for enterprises that already have an existing business system (from 02 stores, business locations, branches onwards), the start time for calculating the operating time of the business system will be based on the time of issuance of the business operation license for the first store, business location, or branch.

Conversely, for the franchisee, Decree 08/2018/ND-CP abolished the requirement that the franchisee must be a trader registered to conduct business in a field compatible with the subject of the commercial right, thereby allowing this entity to freely participate in franchise relationships without being constrained by any conditions. Thus, from a legal perspective, the franchisor does not need to consider the conditions of the franchisee. However, we note that in judgment No. 03/2022/KDTM-PT dated February 21, 2022, of the High People's Court in Da Nang City, the Court still cited requirements regarding the conditions for the franchisee, that the franchisee must register for business in a field compatible with the subject of the commercial right in order to nullify the contract, even though at the time of the dispute, Decree 08/2018/ND-CP was in effect. As mentioned, in this judgment, the Court cited a legal provision that had expired. We believe that this Court ruling is only for reference and cannot be used as a basis for parties to apply in practice when conducting franchise activities if the parties do not reach an agreement. Although current legal regulations do not impose requirements on the franchisee in franchise activities, to protect their rights and interests, the franchisor can still negotiate strict conditions for the franchisee. In our opinion, the franchisor should still impose conditions on the franchisee regarding the need to register for business in a field compatible with the franchise system to better ensure the purpose of the franchisor when participating in franchise relationships, as well as to facilitate the smooth operation of this activity. Furthermore, cooperating with a franchisee in a suitable business sector who has some understanding of the franchise field, the franchisor can be more confident in the franchisee's ability to comply with instructions and requirements for arranging and operating business facilities in line with the franchise business system. Moreover, the conditions for business registration are relatively easy for the franchisee to meet in practice.

Form of franchise contracts

In addition to the subject conditions, the franchisor also needs to pay attention to the form of the franchise contract, which must be established in writing or in other forms equivalent in legal value. In the case mentioned above, even if the parties in dispute meet the subject conditions to participate in the franchise relationship, some contents of the contract may still be declared null and void because they were only agreed orally, not ensuring the formal conditions as stipulated by law.

From its perspective, the franchisor needs to pay special attention to the form of the franchise contract, because even though the legal consequence of a null and void franchise contract is that the parties will return what they have received to each other, for assets such as trade secrets provided to the franchisee, the franchisor may hardly or only partially recover these assets after transfer. 

The issue at hand is typically that the assigning party would not want their trade secrets and business secrets to be disclosed in written form or any other legally equivalent form, as it's understandable that these forms are prone to external exposure. However, because these business secrets ultimately constitute the content of the franchise agreement, they must necessarily be expressed in written form or other legally equivalent forms. At this point, the assigning party can protect their confidential data through provisions on information security and request compensation for damages if the business secrets are disclosed by the assignee to a third party.

Protecting trademarks before executing franchise activities

In commercial franchising, the most crucial element is the transfer of commercial rights from the franchisor to the franchisee, such as trademarks, trade secrets, trade names, or business slogans. The story of Phở Thìn has left an important lesson for businesses in protecting their brands. In line with the content of this article, we believe that businesses need to focus on registering trademark protection before engaging in franchise activities.

Intellectual property rights for trademarks are only established when the franchisor proceeds to register and is granted a protection certificate by the competent authority. Only then can the franchisor become the sole owner to hold, exploit, transfer, or sublicense that trademark to franchisees.

However, once the application for intellectual property rights registration for a trademark is submitted, the franchisor may enjoy priority rights based on the first-to-file principle. Therefore, the franchisor can rest assured regarding their trademark even though the examination and issuance of the protection certificate may take time. Besides avoiding future disputes, businesses also need to note that they cannot transfer or sublicense an object that is not within their ownership rights, hence the importance of completing the legal procedures to protect the trademark before proceeding with franchising. Additionally, the franchisor should also be mindful of the validity period of the protection certificate to timely carry out renewal procedures.

Considerations when generating sub-franchising activities

In cases where the franchisee wishes to transfer commercial rights to a sub-franchisee, the franchisee must obtain written consent from the franchisor, except as outlined below. Sub-franchising has significant implications for the original franchisor. The consistency and coherence within the franchised chain of stores and the brand reputation are crucial objectives that the franchisor seeks to ensure when engaging in franchise relationships.

If the sub-franchisee fails to ensure operations, arrangements, and business setups according to the franchisor's requirements, there is a risk of creating a negative impression on customers, directly impacting the franchisor's brand. Moreover, the sub-franchisee is almost no longer bound by any responsibility after completing the transfer. Therefore, during the inquiry phase by the sub-franchisee, the franchisor needs to carefully assess the next entity that will receive their commercial rights, while also responding within the statutory time frame.

Specifically, according to current regulations, if 15 days have passed since receiving the request document from the sub-franchisee without a response from the franchisor, it is assumed that the franchisor has approved the sub-franchising.

In summary, franchising can bring many benefits to all parties involved; however, this activity also entails various risks and potential disputes, especially for the franchisor. Therefore, the franchisor needs to thoroughly study legal regulations and may seek advice from professional consulting firms before engaging in franchise transactions.

The Case of Phở Thìn: Lessons on Commercial Franchising

Since early February 2023, a Phở Thìn restaurant opened in Thu Duc City (Ho Chi Minh City), claiming to be the "successor" of Phở Thìn 13 Lò Đúc in Hanoi. However, Mr. Nguyen Trong Thin, the owner of Phở Thìn 13 Lò Đúc in Hanoi, stated that there is no "successor" to his establishment. Phở Thìn is a familiar name known to many Vietnamese, and anyone who has tasted it knows that this pho originates from Hanoi. However, ownership of this trademark is not clear to everyone.

According to official announcements on the website http://wipopublish.ipvietnam.gov.vn (Vietnam's intellectual property database), as of February 26, 2023, the name "Phở Thìn" appeared in 13 trademark registration applications submitted to the National Office of Intellectual Property of Vietnam by various organizations and individuals. Among them, those who applied for the name "Phở Thìn" include Mr. Bui Chi Dat (mentioned in the media as the owner of Phở Thìn Bờ Hồ), Mr. Nguyen Trong Thin (owner of Phở Thìn 13 Lò Đúc in Hanoi), and the partnership company for preserving and developing the Phở Thìn 13 Lò Đúc brand (legally represented by Mr. Nguyen Trong Thin)...

However, currently in Vietnam, only Mr. Bui Chi Dat and Mrs. Bui Thi Thanh Nhan are joint owners of the "Phở Thìn" trademark for the restaurant service sector (pho restaurants), which has been granted protection.

During the trademark protection period, the owner has various methods to use and commercialize their trademark, including sublicensing.

Currently, there is no information about whether these two owners have transferred or sublicensed the use of the "Phở Thìn" trademark. Because the transfer of trademark usage does not require registration with the National Office of Intellectual Property as previously regulated, but the transfer still needs to be registered.

Prior to Phở Thìn, in the restaurant sector, many trademark disputes and infringements have been resolved using various measures. For example, Trung Nguyen Group faced a situation where the E-Coffee trademark was registered by another company in Vietnam before they started franchising E-Coffee outlets. The owner of the registered trademark has issued widespread notices to avoid confusion with Trung Nguyen. Trung Nguyen Group has submitted an application for registration, but the final registration result is pending. Similarly, the trademark infringement of "Sườn Cây" by the owner - Vien Ngoc Moi Investment Corporation has been resolved by the court.

In business reality, besides sublicensing, commercial franchising is also a commonly applied method to exploit the value of trademarks, especially in the Food and Beverage (F&B) sector. According to the Commercial Law, commercial franchising activities are often associated with the exploitation of intellectual property rights, including trademarks. Before engaging in commercial franchising, the owner (franchisor) needs to complete all registration procedures and establish rights over the intended intellectual property objects within the franchising system.

Once granted a certificate, the owner will not need to prove ownership in case of disputes related to franchised objects... For the utmost safety, the owner should establish ownership over intellectual property objects before proceeding with franchising activities. In commercial franchising activities as well as in regular business operations, if the owner rigorously handles infringement activities, resolves disputes (if any) early on, they can avoid risks for their franchising activities.

In the current Phở Thìn story, if the owner (legally protected) had protection and handled infringements from the early days (when granted protection) to ensure exclusive exploitation and use of the "Phở Thìn" name in the market, there would surely be no disputes as we see today.

Having such controversial information, whether desired or not, will have a significant impact on the owner's exploitation, as well as affecting other parties. From another perspective, if other organizations or individuals intend to use the trademark but find it already protected by another owner, they should avoid investing in business activities using this name to avoid unfavorable legal consequences in disputes or infringement cases.

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