The new Brazilian Franchising Law, No. 13,966, published on December 27, 2019 (“New Franchising Law” or “New Law”), came into force on March 26, 2020, bringing some important innovations regarding the franchising system, as a result of some issues that franchisors and franchisees were facing because of some lacks that the previous law presented, especially innovations in the field of industrial and contractual property.
The New Law adopted more technically adequate terminologies, both from a legal and marketing perspective, but preserving its principiological bias, with no prejudice to the dynamism of the franchising market.
Against this background, it is worth mentioning the concept of business franchise, which consists in the system by which the franchisor “authorizes the use of trademarks and other intellectual property objects always associated with the right of exclusive or non-exclusive production or distribution of products or services and also the right to use methods and systems of implementation and administration of business or operating system developed or held by the franchisor, against direct or indirect compensation, without characterizing consumption or employment relationship with the franchisee or its employees, even during the training period (article 1 of the New Law).
Based on this concept, it is necessary to emphasize the use of the term “authorizes” instead of “assigns the right to use a trademark or patent”, since the right of use, in fact, is not assigned, but rather authorized or licensed, which is conceptually more appropriate from the point of view of industrial property. It also replaced the expression “semi-exclusive” with “non-exclusive”, clarifying the total freedom of the parties on the issue of exclusivity.
Article 2 of the New Franchise Law expressly provides that only the holder or the applicant, or a person authorized by the holder, of trademark rights and other industrial property objects may dispose of them as a franchisor, in order to strengthen the protection provided for in the industrial property laws.
The New Law also expressly clarifies the contractual relationship, in the sense of definitively eliminating not only the scenario of a labor relationship, but also the hypothesis of a consumer relationship, transforming into law what was already a majority understanding of Brazilian doctrine and jurisprudence and ratifying the sui generis character of such relationship.
Moreover, other new provisions included by the New Law concern the possibility of adopting the franchising system not only by private companies, but also by state-owned and non-profit entities, regardless of the segment in which it operates. However, on the other hand, Brazilian President vetoed another article of the same law that regarded to the public tender rules for this business model applicable specifically to the adoption of the franchising system by public or mixed economy companies and entities controlled directly or indirectly by the Union, States, Federal District and municipalities, which, according to the President, would give rise to legal uncertainty, since it contained an incongruence with the State Law No. 13,3030/2016. Still regarding to the system of franchises by public agency, such entity is obliged to deliver the Franchise Offering Circular (“COF”) at the beginning of selection process, and not in the same period of up to ten days before the signing of the contract, as in the case of private entities.
In terms of the COF, the New Law brought a greater protection to franchisees by determining several other items that must be provided for in the mentioned document issued by the franchisor. Among them are the rules of territorial competition between own and franchised units, information on obligations of the franchisee to purchase goods, services or inputs only from suppliers indicated by the franchisor, including the complete list of these suppliers, and the indication of what is offered to the franchisee regarding the incorporation of technological innovations. There was also attention to include mention not only of the situation of intellectual property objects before INPI, but also of cultivars before the National Service for the Protection of Cultivars.
It was also included as mandatory to be on the COF: (a) rules of transfer or succession; (b) circumstances in which penalties, fines or indemnifications are applied and their respective values; (c) existence or non-existence of minimum purchase quotas by the franchisee with the franchisor, or third parties designated by the franchisor, and the possibility and conditions for the refusal of products or services required by the franchisor; (d) indication of the existence of a board or association of franchisees, with the attributions, powers and mechanisms of representation before the franchisor, and details of the competencies for management and supervision of the application of existing funds and resources; (e) rules limiting competition between the franchisor and the franchisees, and among the franchisees, and details on the territorial coverage, as well as the term of restriction and the penalties for non-compliance; (f) precise specification of the contractual term and renewal conditions; and (g) place, date and time to receive the proposed documentation, as well as to start opening the envelopes, when it is a public agency or entity.
A further relevant innovation concerns the inclusion of specific provisions for the hypothesis in which the franchisee’s commercial point will be sublet from the franchisor, in which case both may propose a renewal action, except in cases of default, and the value of the sublet may only be higher than the value of the main lease contract when expressly provided for in the COF, as well as provided that the higher amount paid to the franchisor in the sublease does not imply excessive onerosity to the franchisee, ensuring the maintenance of the economic and financial balance of the sublease in the term of the franchise contract.
An upgrade no less important was the attention given to international contracts, including their conception in accordance with the Law of Introduction to the Norms of Brazilian Law and the possibility for the parties to elect as governing law and competent jurisdiction those of the domicile of either.
Still with regard to international contracts, it can generate a deadlock, since the contracts must be written in Portuguese or have a certified translation. In relation to that translation, currently the Brazilian National Institute of Industrial Property (INPI) does not request the submission of documents with certified translation, but the New Law brought the concept of “certified translation”, without giving a precise definition. An effective alternative will be the submission of a bicolumn contract, in which the prevalence of the language is the national.
Furthermore, in order to legitimize the understanding already adopted in Brazil, the New Franchising Law expressly allowed the option for conflicts resolution through arbitration. It is necessary to warn that, in the case of a contract with standard clauses pre-established mainly by the franchisor, to ensure its validity, it is recommended that the arbitration clause be highlighted in an attached document or in bold, with signature or the franchisee’s special initial for the clause, observing the provisions of the Brazilian Arbitration Law, 9,307/96.
Finally, although the New Franchise Law does not expressly mention the issue related to personal data protection, due to the Brazilian General Data Protection Law (Federal Law No. 13,709/2018 – “LGPD”), the franchisor – as the owner of the brand, product or service – may be impacted by non-compliance with the LGPD by any franchisee, and thus suffer a devaluation of its franchise in the market, either domestic or international. Even being intrinsic to the franchisee to comply with the laws in force, it is important that the franchise contract or COF expressly state the responsibilities and obligations inherent to the data collected, stored and processed during the contractual relationship.