Russian Underground Franchising

Valery Perkov
General Manager
Russian Association of Franchising

A commentary to Article 54 of the Civil Code of the Russian Federation (1st edition), says that a commercial concession contract is the prototype for a form of business that is well-known in the west: franchising. Later editions of the Civil Code do not contain this commentary.

When we think about the potential for developing this form of business in Russia, we see a slightly absurd situation, namely that franchising in our country has excellent prospects, but that the commercial concession contract has no prospects.

Here are some figures to substantiate that claim:

Before the 2009 AGM of the Russian Association of Franchising, the association conducted a survey of its members and other franchise companies, dealing with the main problems associated with the normative law regulation of franchising relationships in the Russian Federation. The survey was sent to more than 550 electronic addresses. We received answers from 57 companies, which is about 12 percent of those surveyed. A mail-out was also sent asking companies about how they applied commercial concession contracts. Positive answers were received from only 25 respondents, which is less than 5 percent. The Rospatent 2008 report showed that there were 519 commercial concession contracts registered in that year. Going by that data, every franchisor completed less than one commercial concession contract for the year. In addition, there were 8,807 contracts giving the right to use trademarks registered in 2008.

It must be noted here that this transfer to another legal entity of the right to use a company’s trademark is the first step in forming a franchising relationship between independent companies. The quantity of registered contracts giving the right to use trademarks is a more realistic indicator of the state of franchising in Russia. These figures graphically demonstrate that the overwhelming majority of companies that use elements of franchising in their development do not use commercial concession contracts with their partners but use different contracts under different names.

Companies use many ways to avoid the terms franchising and commercial concession in order to avoid the process of registration when signing contracts, re-registering any changes in the contract, and finally registering annulment of a contract. To condemn the owner of a firm for not using the given terminology would not be logical. Since any registration and re-registration involves financial outlay, we can only imagine what the fees for complying with all the bureaucratic requirements can add up to if the franchisor has more than a hundred franchises.

When copyright is registered for a trademark, the holder receives a license saying that the trademark is their property. But according to law they cannot actually use it independently. This would be logical if the actual owner was changing. But the essence of franchising is that the owner does not change, but rather transfers the right to use the trademark to others, effectively renting it out.

Proof of legitimate use of a trademark is acknowledged only with the license or by the presence of the contract giving the right to use the trademark, signed by the copyright holder. If these documents are missing then it counts as illegitimate use of intellectual property. And this should be enough regulation. Any other requirements are just bureaucratic obstacles, imposing extra and unproductive expenses on the copyright holder.

Another interesting fact is that when selling Russian franchises abroad, the Rospatent contract registration is not required, in contrast to the situation when selling in Russia. And it is immaterial to Rospatent whether registration of these contracts is required abroad or not. Why such injustice and inconsistency?

The explanation for these requirements for registration and other requirements in the commentary to Article 54 of the Civil Code is the necessity of protecting the interests of the end consumer and buyers of the franchise. This can only be applauded. But actually this article does not defend the right of the copyright holder. Moreover, for protecting the end users of goods and services there is already the law for defending consumer rights. This law should also work for franchises, and to create another law here would be superfluous. The only thing that can protect buyers of a franchise is requiring the disclosure of detailed information about that franchise. Then potential buyers can make motivated decisions about whether to acquire the franchise or not.

In 1985, the International Institute for the Unification of Private Law (UNIDROIT) started to investigate the problems of developing franchising in the world. This included cases that came to light in various countries of swindling in the sphere of franchising, and of the real dangers associated with this practice becoming widespread in other countries. In connection with this, UNIDROIT created a group for studying the problem of franchising, which was charged with investigating different aspects of franchising, in particular the issue of each side disclosing information to the other before and after signing the franchising contract. The group studied national and international franchising operations, analyzed current problems and discussed whether any of these problems could be solved with an international document prepared by UNIDROIT.

When studying the issue of internal franchising, the group concentrated on the issue of disclosure of information. In connection with this, they studied:

• The experience of countries that have or are trying to implement normative acts in this area;

• The role of franchising associations;

• And the importance of business etiquette norms accepted by these associations.

In connection with this, the group noticed that in several countries legislature is tied to registration requirements that significantly increase the burden on the copyright holder.

To sum up, the group arrived at the conclusion that the experience of states with legislature for legal relationships was negative while experience with laws for disclosure of information was entirely positive. Besides that, since reaching an agreement about the composition of the information that copyright holders are bound to disclose to the prospective user, independent of the sector of the economy, and to provide a high level of uniformity for all forms of franchising using the disclosure method would be much more simple than to work out general norms for legal relationships in view of the huge variety of relationships that exist in the context of franchising, led the group to the conclusion that the regulating article on an international level should be the disclosure of information.

On the basis of the group’s propositions, in September 2002 the committee of law experts carried a model law and explanatory note and passed it for confirmation to the managing council of UNIDROIT.

It is evidently pointless to ignore the results of many years of work studying the problem of developing franchising in the world by such a respected organization as UNIDROIT, of which Russia is also a member. We should take immediate action to change Russian legislature so that franchising can freely develop in our country.