- On 27 December 2019, the new Brazilian Franchising Law (“BFL”) was officially published. This Law replaces in full the previous Franchising Law.
- The BFL is more comprehensive than its predecessor and brings Brazil closer in line with modern jurisdictions. Among other things, the BFL imposes stricter obligations on franchisors (especially in relation to disclosures) and addresses some international franchising issues (not altogether adequately).
- The BFL also introduces new protections to franchisees relating to leases over the premises where the franchise will operate. These include mandatory disclosures in the franchise disclosure agreement and an irrevocable right to renew the lease provided to the franchisee.
- The BFL comes into force on 25 March 2020.
What is a franchise arrangement?
The BFL contains a detailed definition of franchising. It defines franchising as an arrangement where:
- a franchisor by contract authorises a franchisee;
- to use trademarks and other intellectual property rights;
- [the intellectual property rights are] associated with the right to: (a) produce or distribute exclusive or non-exclusive products or services; and (b) use deployment and business management methods and systems, or operating systems developed or owned by the franchisor;
- in exchange for the payment of fees.
The new definition expressly excludes consumer or employment relationships from the franchisor-franchisee relationship. This was inserted expressly to exclude the risk of courts finding that employment and consumer protection laws apply to franchising arrangements.
Moreover, the BFL provides that the intellectual property rights to be used in the franchising arrangement do not need to have been granted to its owner (applications filed for registration are sufficient).
What does the Franchising Disclosure Document need to contain?
The Franchising Disclosure Document (“FDD”, Circular de Oferta de Franquia in Portuguese) requires substantially more detailed than under the previous Law. The FDD must be written in Portuguese, with “objective and accessible” language and must contain:
- a summarised history of the franchise business;
- full details about the franchisor and its related entities, together with their Brazilian company tax number (Cadastro das Pessoas Jurídicas, “CNPJ”);
- balance sheets and financial statements relating to the two previous tax years;
- a list of the court cases relating to the franchise “that challenge the system or that may compromise the operation of the franchise” in Brazil and that have the master franchisor, its controlling entities, the subfranchisor and the holders of the trademarks and other related intellectual property rights;
- a detailed description of the franchise, and a general description of the business and the activities that will be performed by the franchisee;
- the joining or franchising fee;
- a profile of the ideal franchisee as it refers to prior experience, level of education and other characteristics that the franchisee must have or may preferably have;
- the requirements relating to the franchisee’s direct involvement in the operation and management of the business;
- details about the total estimated initial investment required for the acquisition, deployment and start of operations of the franchise;
- details about the estimated value of the installations, equipment and initial stock and payment terms for these;
- a list containing the name, address and telephone numbers of all existing franchisees, sub-franchisees or sub-franchisors, and all those that have terminated the franchise relationship in the previous 24 months;
- details about the territorial policy (including if the franchisee has exclusivity or a right of first refusal over the territory and if the franchisee can make sales or provide services outside of the territory or export them, and the rules about territorial competition between franchisor-owned and franchisees in the territory);
- details about the franchisee’s obligation to purchase any goods, services or raw materials required for the deployment, operation or management of the franchise from franchisor-approved suppliers (including complete list of these supplies);
- what will be offered to the franchisee and the terms and conditions applicable to support, franchise network supervision, services, technological innovation, franchisee and employee training (including duration, content and costs), franchise manuals, assistance in the analysis and choice of location where the franchise will be located, and layout and architectural standards for the franchise (including physical location of equipment, list of equipment and architectural drawings);
- details about the trademark and other intellectual property rights relating to the franchise that will be used by the franchisee;
- details about how the product, process or management know-how and confidential information relating to industry, commerce, finance and business will be dealt with upon termination and whether the franchisee will be allowed to compete with the franchise;
- a full a copy of the standard franchise agreement (and preliminary contract, if any) to be entered into with the proposed franchisee;
- assignment and succession rules (if any);
- events that will trigger penalties, fines or payment of damages and their respective amounts;
- information on the existence of minimum purchase quotas by the franchisee from the franchisor or those designated by the franchisor, and the possibility and conditions for refusal of the products or services required by the franchisor;
- whether a board or association of franchisees exists and, if so, the attributions, powers and mechanisms of representation before the franchisor, and details about the powers over management and supervision over fund allocations;
- indication of the rules limiting competition between the franchisor and the franchisees, and among the franchisees, during the term of the franchise agreement, and details of the territorial scope, the term of the restriction and the penalties for non-compliance;
- the franchise contract’s term and renewal conditions (if any);
- ongoing fees “as well as other amounts” to be paid to the franchisor or to third parties indicated by the franchisor, “detailing the respective formulas and what the fee is being paid for or for what [the funds] are to be used” (the ongoing fee for the franchise “system”, the rent for equipment or lease payments for the location of the business, the marketing fee and the minimum insurance must be stated);
- state that the franchisor can make a profit from subleasing the premises to the franchisee (only required if the franchisee subleases the business premises from the franchisor and the franchisor makes a profit from that arrangement – see further below).
When does the Franchising Disclosure Document have to be delivered to the prospect franchisee?
The FDD must be delivered to the prospect franchisee at least 10 days before the earlier of:
- the signing of the franchising agreement (or preliminary contract, if any); or
- the franchisee pays any fee to the franchisor or any entity related to the franchisor.
Rules applicable to premises subleased by the franchisor to the franchisee
The BFL introduces new rules relating to subleases which have the franchisor as the sublessor. Where the franchisor will be subleasing the premises where the franchise will operate from, the BFL provides that both the franchisor and the franchisee will have the right to renew the main lease (except in the case of breach of the lease or of the franchise agreement).
Moreover, if the franchisor charges the franchisee more than the franchisor pays on the main lease, then:
- this must be “expressly and clearly” written in the FDD and in the franchise agreement; and
- the amount charged by the franchisor must not be “excessively onerous” on the franchisee and the court (or arbitrator) will have the right to intervene to “maintain the economic and financial balance” during the term of the franchise.
Language, choice of law, and choice of forum and arbitration
The franchise agreements that apply exclusively in Brazil must be in Portuguese and governed by Brazilian law.
A franchise agreement will be considered an “international franchise agreement” for the purposes of the BFL if the contract “[d]ue to the acts relating to its making or performance, the parties’ nationality or domicile or the location of the subject-matter” is connected to “more than one legal system”.
International franchise agreements drafted in a foreign language need to be translated into Portuguese (the translation “must be paid for by the franchisor” and must be “certified”).
The parties may only choose one of their domiciles as the forum for any disputes arising from the agreement. Importantly, the parties are bound to maintain a representative in the chosen forum with the power to represent them in administrative and court actions and to be served on their behalf.
Arbitration can now be chosen by the parties as a dispute resolution mechanism.
The new Brazilian Franchising Law materially improves the rules applicable to Brazilian franchising rules. Although parts of the new Law can be criticised, overall the new Law improves the legal framework for franchising in Brazil.
Contact me if you would like further information.
Last modified: January 8, 2020