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Laws Affecting Franchising in India
Laws Affecting Franchising in India
Franchising Association of Indias 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.
Legal
definition of Franchise:
Blacks 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
taverns
the
In 1851, Singer Sewing Machine Co. began granting distribution franchises for its sewing machines. Thus began the modern concept of franchising.
Evolution
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, franchisees ownership of business, payment to franchisor, etc. Franchising of foreign brands evolved in India as an unregulated method of introducing foreign brands in India.
franchisee retailer directly sells the franchisors products e.g. Kodak Express, Bose Corp., Wellspun, Shehnaz Hussain. Licensed Manufacturer-Wholesaler Franchisee, under this model, manufactures & distributes the franchisors products, e.g. bottling of soft drinks Coke & Pepsi.
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, Shoppers 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; Geographical Indication of Goods The (Registration & Protection) Act, 1999; The Designs Act, 2000; and The Semiconductor Integrated Circuits Layout Design Act, 2000.
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. Agreements 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
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
MacDonalds (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 Wendys 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
In Fruit Juices & Beverages; In Milk & Dairy Products; In Cooking Oil & Food Products.
Consumer
- MacDonald's French
Best
Practices
Staff Training Quality Checks Surprise Audits Customer Feedback Care for the Environment
&
Indias 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, MacDonalds, Kodak, Crossword, KFC, Subway are consolidating.