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Introduction |
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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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Conclusion |
 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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