Vol. XIII No.5
May 2008



Hamburgers, Pizza, Donuts & Coffee: Franchising in Romania ...

Romanians have developed into brand conscious consumers during the eleven years that have passed since Romania enacted a franchise law. The market has almost fully evolved, and the pioneering period in franchising during which major companies entered the market only for market testing - first performing distribution operations (Coca Cola) or establishing a subsidiary (McDonald’s) and only afterwards developing their franchise concepts - ended some time ago. Today, hundreds of franchises are operating in Romania and anaylists see the Romanian franchise market reaching € 3 billion by 2010.

What entices franchisors to come to Romania? With a population of over 22 million inhabitants, Romania represents a very large market within the European Union. Romanian consumers are highly receptive to and demonstrate an affinity towards international brands. Even following the fall of communism in 1990, Romanians clamored after name brand designer clothing, albeit much of what they bought turned out to be counterfeits. Over time, many of the well-known franchises established some form of operation in Romania and most of those have become success stories. The idea of “buying” an already successful business and “selling” a famous name has been heartily embraced by Romanian entrepreneurs. But so far, franchising has developed mainly in retail, services – hotel accommodations, restaurants, catering and, to a lesser extent, in the services industry. There still is room enough for firms who are interested in entering the Romanian market. The Franchise Network Association of Romania (A.R.F.R.) is supportive of new franchises, and seeks to improve both the legal and the social conditions for the development of such operations through market studies and research. Indeed, the Internet contains sites that list franchisors looking for franchisees in Romania.

When franchising in Romania, bear in mind that pursuant to the Romania’s franchise law, a franchisor must be the holder (i.e., either owner or holder of rights) of the applicable intellectual or industrial property in order to register the trademark with the Romanian State Office for Inventions and Trademarks. Note that the registration of a trademark in Romania may take up to 16 months.

There are two registration requirements: the franchise agreement or a short form license agreement must be registered with the Romanian State Office for Inventions and Trademarks and, in certain circumstances, based upon the parties’ turnover and market share in Romania, with the Romanian Competition Council, in order to obtain either a block/individual exemption or a non-objection decision for the respective franchise agreement. The franchise law also provides that franchisor must disclose certain information to the franchisee. The law is not specific with regard to the kind of information to be disclosed, but provides that the information must be sufficient to enable a franchisee to draft a financial plan. In practice, the disclosure of the information referred to in the Uniform Franchise Offering Circular is sufficient.

Romania’s franchise disclosure requirements and its regulatory framework are set forth in Government Ordinance No.52/1997, as amended by Law No.79/1998 (hereinafter referred to as the “Franchise Law”). There are specific provisions applicable to the pre-contractual, contractual and post–contractual relationship between the franchisor and the franchisee and those elements are described in this article.

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Disclosure Requirements in The Pre-contractual Phase
In the pre-contractual phase, a franchisor is required to provide the prospective franchisee with certain information through a so-called “Disclosure Document”. The purpose of such disclosure is to enable the franchisee to make an appropriate decision regarding whether or not to enter into the franchise relationship. The Disclosure Document must be submitted before the franchisee undertakes any legal obligations with respect to the proposed business. The legal provisions in force do not provide for a specific form under which the Disclosure Document must be issued. Nevertheless, the franchise law states that such document must include, among other things, a description of the franchisor’s experience in the proposed business; information on the financial conditions in the franchise agreement, i.e., the initial royalty or entry fee to the franchise network; the scope of any exclusivity arrangement; and information on the duration, renewal conditions, resolution and termination of the franchise agreement. These matters are provided by the franchise law as the minimal information that must be disclosed by the franchisor. Additional information should also be provided to the extent that such other information would be of interest to the franchisee in making its business determination. No specific penalties are stipulated in the law for the failure to provide such information. However, the franchisee may bring suit against the franchisor for damages caused as result of such non-disclosure or an incomplete disclosure. The burden of proof of any damage lies with the franchisee. Theoretically, criminal liability for misrepresentation is also possible.

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The Franchise Agreement
The trademark of the franchisor is, of course, the key component in the relationship that differentiates a franchise from many other businesses. The franchisor’s trademark is the symbol of the identity and reputation of the franchise and warrants the quality of the product/service/technology provided to consumers. The transfer and control over know-how – among other things, the methods used to obtain the quality associated with the mark -- is designed to ensure the provision of a uniformly similar set of products, services or technology which consumers have come to associate with the trademark. In other words, a McDonald’s restaurant should look basically the same, and its products should appear and taste similar, to what is offered in Baku, Bucharest or Brooklyn, allowing only for modest variations of taste by culture.

According to Romania’s franchise law, the franchise agreement must clearly define the obligations and responsibilities undertaken by the franchisor and the franchisee, as well as any other clauses defining the forms of cooperation between the parties. Irrespective of the nature of the franchise, the franchisor must agree to perform certain functions for the franchisee such as providing managerial consultancy, commercial and technical assistance, training of employees of the franchisee, and granting the right to use certain know-how or a specific trademark or other intellectual property rights. Franchise agreements may include non-compete clauses in order to protect the transferred know-how.

The franchise agreement must reflect the interests of the network franchise members by protecting the industrial and intellectual property right of the franchisor in maintaining the common identity and reputation of the franchise. There is no standard form of franchise agreement in use in Romania because the terms, conditions, and methods of operation of franchises vary widely depending on the type of business involved. Obviously, franchises for printing, employment agencies, and automotive products will differ from franchises for fast food service, convenience stores, or clothing.

In order to conclude a franchise agreement in Romania, the franchisor must have maintained and operated a commercial business for a certain period of time prior to launching the franchising network, although the length of the period is not specified by law. However, it should be a reasonable period, allowing the franchisor to acquire a know-how that is susceptible to transfer through a franchise agreement. Know-how is defined as a set of formulas, technical definitions, documents, drawings and designs, networks, procedures and other analogous elements, used to elaborate and commercialize a product.

The information that represents the know-how is included in a document known as the “Franchise Manual”, which enables the franchisee to establish a proper and clear image of the entire franchise business and also to make and implement the proper decisions in its future activity as franchisee. As the Franchise Manual actually presents, in written form, the manner in which the franchise activity is being conducted, it is therefore an extremely helpful tool for franchisees after their initial training, and the Franchise Manual is consequently also deemed to be a helpful instrument for the franchisor in its endeavor to protect its know-how and commercial secrets throughout the duration of the franchise agreement.

The franchisor must be the holder of the applicable intellectual and/or industrial property rights and provide the franchisee with initial training, as well as with permanent commercial and/or technical assistance for the entire duration of the franchise agreement. One of the specific legal obligations of a franchisee is to develop the franchise network within its territory, while maintaining its common identity, as well as its reputation; the franchisee must provide the franchisor with information regarding the status and financial condition of the franchised business and must maintain confidentiality and undertake not to disclose to third parties any information on the know-how provided by the franchisor, both during the franchise agreement and after the termination of such agreement.

The franchisee must first pay to the franchisor the entry fee due either at the execution of the franchise agreement or at certain intervals set forth in the agreement in exchange for the transfer of know-how and for the franchisor’s initial training support. The franchisee must also pay a certain royalty to the franchisor in exchange for the continuous support and training provided by the franchisor throughout the entire duration of the franchise agreement. The royalty generally represents a percentage of the annual turnover. The franchisee may also be obliged to pay marketing costs in the agreement.

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Post-contractual Phase
Upon termination or expiration of a franchise agreement, the post-contractual relationship between the parties must comply with fair competition practices. According to the Franchise Law, the franchisor is entitled to impose obligations upon a former franchisee to ensure the protection of the confidential character of the business and, especially, the impossibility of a competitor to obtain or use the know-how previously transferred through the franchise agreement. The franchisor is entitled to impose on the franchisee a confidentiality and non-compete clause in order to prevent the franchisee from disclosing information on the know-how transferred during the term of the franchisee agreement. The franchisee is required to return to the franchisor the rights previously transferred in the franchise agreement. Consequently, following termination, the franchisee will be prevented from using the trademarks, any other distinctive symbol of the franchisor or the know-how transferred by the agreement.

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Franchise Advantages and Disadvantages
i) Franchise advantages
Franchising offers Romanian franchisees the advantage of starting up a new business quickly based on a proven trademark and an accepted formula of doing business at the international level, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise offers a turnkey business. With the expertise provided by the franchisor, which thus far is likely to be a foreign company, Romanian franchisees are able to take their franchise business to a level which they might not have had been able to do without the expert guidance of their franchisors. Moreover, franchisors most often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for any Romanian franchisee, it is supported through the traditional franchise fee that the franchisor collects.

ii) Franchise disadvantages
For the Romanian franchisees, the main disadvantage of franchising is an apparent loss of control. While they gain the use of a system, trademarks, business assistance and acumen, training, and marketing, the franchisee is required to follow a proscribed system and get approval for changes from the franchisor. Starting and operating a franchise business carries expenses that include the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time. The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). For example, an incompetent franchisee can easily damage the goodwill of the public towards the franchisor's brand by providing inferior goods or services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.

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Combining the high level of brand awareness among Romania’s 22 million consumers and its accession to the European Union, Romania has become a destination for most major franchisors. Capitalizing upon this interest, the Romanian franchise law encourages the development of franchises.

Indeed, despite the fact that franchise relations are not subject to legislation adopted at the European Union level, Romania is one of the five European Union member states, including Belgium, France, Italy and Spain, which adopted a special law regarding franchise relations.

For these reasons, hundreds of new brands emerge onto the market every year, much above the European average and it seems that this trend will continue for the next several years. The most developed franchise sector in Romania is retail, while services and products are the least developed. Of course, any investor, foreign or Romanian, franchisor or franchisee, must conclude its franchise agreement in compliance with Romanian law and include the specific clauses provided by the law. Consequently, specialized legal advice for both parties to a franchise agreement is warranted.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2008 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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