Transcript Slide 1

Legislations Impacting
Franchising Association of India’s
Workshop in Mumbai on Legal
Issues in Franchising
July 12, 2008
What is Franchising?
Evolution of Franchising
Modes of Franchising in India
Legal Framework for Franchising in India
Some Indian Judgments Impacting Franchising
Issues Impacting Franchising & Global Best Practices
Franchising – The Road Ahead in India
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Perhaps the first answer may well be that
Franchising is a method of marketing goods and
services.
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The root word “Franchise” comes from old French
meaning privilege/ freedom. In middle ages a
franchise was a privilege/ a right.
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Essentially a marketing concept, Franchising is an
innovative method of distributing goods and
services.
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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.
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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….”.
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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.
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In 1851, Singer Sewing Machine Co. began
granting distribution franchises for its
sewing machines. Thus began the modern
concept of franchising.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.:
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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.
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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.
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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 & noncompete contract. All 3 violated contractual obligations.
Court granted order of temporary injunction against them.
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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.
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Food Adulteration Issues i.e.:
 In Fruit Juices & Beverages;
 In Milk & Dairy Products;
 In Cooking Oil & Food Products.
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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:
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Standard Operating Procedures
 Covering all aspects of business including logistics,
storage, display, preparation & serving food, hygiene,
packing, etc.
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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.
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