Legislations Impacting

Franchising Association of India’s

Workshop in Mumbai on Legal
Issues in Franchising
July 12, 2008
 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.
 Few Legal definitions of Franchising exist:
 1st 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.
 1st US franchising legislation of California defines Franchise as a
contract/ agreement between 2 or more persons by which, inter alia,
the operation of the franchisee’s business pursuant to such plan or
system is substantially associated with the franchisee’s TM, SM, trade
name, logo type, advertising or other commercial symbol designating or
its affiliate.
 Legal definition of Franchise:
 Black’s Law Dictionary 7th 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….”.
 The concept of Franchising as we know
today 1st 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.
 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, franchisee’s ownership of business, payment to franchisor,
etc.
 Franchising of foreign brands evolved in India as an unregulated
method of introducing foreign brands in India.
 Some of the franchising models that
exist in India:
 Manufacture-Retailer – Under this model, the
franchisee retailer directly sells the franchisor’s
products e.g. Kodak Express, Bose Corp., Wellspun,
Shehnaz Hussain.
 Manufacturer-Wholesaler – Licensed
Franchisee, under this model, manufactures &
distributes the franchisor’s products, e.g. bottling
of soft drinks Coke & Pepsi.
 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, Shopper’s Stop.
 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, 1872 - Franchising in India is
basically built on the principles of Contract law.
 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.
 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, 2002 - This Act will replace the MRTP Act and will
regulate competition and fairness in business.
 The Specific Relief Act, 1963 - This Act provides specific enforcement for
breach of contract by a party.
 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.
 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.
 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;
 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 Workman’s 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.
 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.
 Agreement’s 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.
 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.
 Breach of Consumer Rights by Franchisor:
 MacDonald’s (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 Wendy’s 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.
 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.
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
 India’s 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, MacDonald‘s, Kodak,
Crossword, KFC, Subway are consolidating.