HERZFELD & RUBIN, P.C. LAWYERS PROFESSIONAL CORPORATION
IN ASSOCIATION WITH RUBIN MEYER DORU & TRANDAFIR

Franchising in Romania:
New Opportunities in a Growth Market

Introduction
Over the past two decades, Romania has made economic growth and development its primary objective. In furtherance of that objective, Romania has adopted several special laws, including: Law on Medium and Small Enterprises (Law No. 346/2004); Law Regarding the Promotion of Foreign Investment Having a Direct Impact on the Economy (Law No. 332/2001); and several state laws which provide state aid to particular industrial sectors. In addition to new legislation, certain structural changes were adopted to promote investment, including: Romania’s accession to the European Union, Romania’s accession to the International Monetary Fund, and the creation of the Romanian Agency for Foreign Investment.

In addition to these initiatives, Romania possesses an enormous potential for economic growth due its many natural attributes; such as possessing one of the largest consumption markets in the European Union, an expanding economy, a well-educated workforce, and access to the Black Sea.

However, despite Romania’s natural attributes and legislative efforts, significant economic growth remains elusive. Because of this, the growth of franchising in Romania cannot and should not be neglected. Franchising only comprised 1% of Romania’s GDP in 2015, but according to the president of the Romanian Franchise Association, franchising is expected to grow to 3% of GDP within the next three years.

Several obstacles must be overcome in order to meet this projection. The most significant of these obstacles is a widespread and deficient understanding of the legal framework in place to regulate franchising in Romania. Thus, if franchising in Romania is to grow, it is critically important that both franchisors and franchisees have a firm understanding of the current state of the law.

Pre-Contractual Phase
The first step when entering into a franchise agreement is the pre-contractual phase. In this initial step, the parties exchange information and establish some of the foundational elements of the franchising agreement, such as the amount the franchisee will pay in royalties. Because the pre-contractual phase necessarily involves the disclosure of a significant amount of information, it is also the stage in the process when the parties agree on the confidentiality and non-compete clauses of the franchising agreement. Under such clauses, the franchisee typically agrees not to divulge any potentially harmful information to third parties and the franchisor agrees to not search for another potential partner in the same area without the prior approval of the franchisee.

Franchise Agreement
In Romania, franchise agreements are governed by Government Ordinance No. 52/1997, the so-called “Franchise Law.” Under this law, a franchise agreement must define, free of any ambiguity, the obligations and liabilities of all of the parties, and it must contain the following elements: (1) the subject matter of the contract; (2) the rights and obligations of all parties; (3) financial clauses; (4) a duration provision; and (5) provisions related to modifying, extending, and cancelling the agreement. The Franchise Law sets out the required elements of a valid franchise agreement, but it does not establish substantive standards for these elements. For example, the Franchise Law requires that a franchise agreement contain a duration provision, but it does not require either a minimum or maximum duration in order for the agreement to be valid. The Franchise Law does provide some substantive requirements, however; one such requirement is that the franchisee must be able to amortize its investment.

Main Obligations
The Franchise Law imposes certain major obligations upon franchisors:

1. the franchisor is required to hold and develop a commercial business for a reasonable period of time prior to launching a franchising network;
2. the franchisor must be the holder of the applicable intellectual property rights; and
3. the franchisor must provide the franchisee with initial training, as well as permanent commercial and technical assistance for the entire duration of the franchise agreement.

Regarding the first obligation, the Franchise Law does not specify the minimum period of time a franchisor must be in business before launching a franchise; the law only requires a period of time long enough to allow the franchisor to acquire transferable commercial know-how. Under the Franchise Law, such know-how is defined as formulas, technical information, documents, drawings and designs, networks, procedures and other analogous elements, used to create and commercialize a product. This information is then compiled into a document called the “Franchise Manual.” The Franchise Manual is extremely helpful for both the franchisor and the franchisee. For the franchisee, the Franchise Manual provides an overview of the entire franchise business and enables the franchisee to make sound business decisions. For the franchisor, the Franchise Manual is a helpful tool to protect its intellectual property and trade secrets during the duration of the franchise agreement.

The Franchise Law also imposes certain major obligations upon franchisees:

1. the franchisee must develop the franchise network and maintain the franchisor’s brand and reputation;
2. the franchisee must provide regular financial reports to the franchisor in relation to the franchised business;
3. the franchisee must not disclose any confidential information to third parties;
4. the franchisee must remit the initial fee to the franchisor either on the date the agreement is executed or on some other date provided within the franchise agreement, in exchange of the transfer of know-how and of the franchisor’s initial training support; and
5. the franchisee must pay some type of royalty (typically a percentage of annual turnover) to the franchisor in exchange for the franchisor’s continuing commercial and technical support.

Confidentiality Clause
Under the Franchise Law, franchisees are prohibited from disclosing any confidential information provided by the franchisor both during the term of the franchise agreement and after its termination. In addition to these protections, franchisors may also impose more rigorous non-disclosure requirements on franchisees.

The ability of franchisors to protect confidential information by contract is of particular importance as Romania does not currently have any special legislation protecting trade secrets. The only reference Romanian law makes to the protection of trade secrets is in the Franchise Law and in Law No. 298/2001, which amended Law No. 11/1991 (the “Unfair Competition Law”). The Unfair Competition Law defines “trade secret” as information which is not public, nor easily available to individuals acting in a business where such type of information is customarily used, and which becomes valuable by being kept secret by its holder through reasonable measures. The unlawful disclosure, acquisition, or use of a trade secret by a person may constitute either a tort or a crime, depending on the particular circumstances of the disclosure.

Non-Compete Clause
There is no question that free and fair competition is essential to ensure the strength and resilience of a market economy. In the franchise context, however, unrestrained competition can be harmful as the franchise relationship requires exclusivity between the parties in order to function as intended. Conversely, parties in a franchise agreement must be careful to ensure that the agreement does not violate Romania’s antitrust regulations which prohibit price-fixing and market allocation schemes among competitors.

Territorial-Exclusivity Clause
The Franchise Law also provides that parties that wish to do so may include a territorial exclusivity clause in their franchise agreement. Under such a clause, the franchisor agrees that it will not compete with the franchisee in its own territory, nor will it enter into franchise agreements with any third parties within the same territory.

Such a clause is understandable in light of the franchisee’s interest in amortizing its investment. If the franchisor is to perform the same activity in the same area where the franchisee is active, or it allows third parties to be active in the same area, the franchisee will stand little chance of recovering its initial investment. In consideration for territorial exclusivity, franchisees typically pay an exclusivity fee to the franchisor defined by the terms of the franchise agreement.

Minimum Turnover Requirements
As mentioned above, the amount the franchisee pays in royalties is typically described as a percentage of the franchisee’s annual turnover. As a result, many franchise agreements include a minimum turnover requirement in order to guarantee a minimum level of income for the franchisor. Under Romanian law, the franchisee’s failure to meet minimum turnover requirements can serve as valid grounds for termination of the franchise agreement.

Misrepresentation Claims
Franchise agreements also regularly include clauses designed to protect franchisors from claims of misrepresentation by franchisees. Under such clauses, the franchisee acknowledges that it has independently reviewed the information provided by the franchisor, the information is true and complete, and the information is sufficient for the franchisee to enter into the specific franchise agreement in question.

Return of Rights Upon Termination of the Franchise Agreement
Upon termination of the franchise agreement, the franchisee is required to relinquish all rights to intellectual property provided by the franchisor and to immediately cease the use of all trademarks and trade secrets.

Assignment
Under Romanian law, a party to a contract is free to assign its rights, but obligations may only be assigned subject to the approval of the other party. The Franchise Law incorporates this principle by mandating that the franchise agreement “clearly provide” the terms of transfer to a third party. Unfortunately, the specificity of the law’s mandate ends there. In practice, parties usually provide that the transfer occur subject to some triggering condition, such as obtaining the franchisor’s consent or the payment of any outstanding fees.

Choice of Law
Another element of the franchise agreement that should be carefully considered is the choice of law provision. Parties are generally free to choose the law that will govern the agreement, and Romanian courts will typically respect the decision of the parties. The parties are also free to choose the forum by submitting disputes to international arbitration or non-Romanian courts. Arbitration and mediation clauses are generally enforceable under Romanian law. Romania is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the European Convention on International Commercial Arbitration. Additionally, Romania has a national International Commerce Arbitration Court that is administered by the Romanian Chamber of Commerce and Industry, a non-governmental organization.

Other Issues
Lastly, the Franchise Law also provides that a franchise agreement must observe the following principles:

• the duration for the agreement must be established so as to allow the franchisee to allow depreciation of this investment;
• the franchisor must inform the franchisee, by prior notice, of its decision not to renew the franchise agreement upon its expiry or to not sign a new agreement. The Franchise Law does not provide further details with regard to the term of the notice; however, in practice, a six months prior notice should be considered reasonable;
• the causes for termination must be specifically specified. Moreover, the Franchise Law stipulates that in case of breach by franchisee, the franchisor must notify the franchisee of such breach and grant a reasonable cure period.

Registering with the Competition Council
Romanian law No. 21/1996 (“the Competition Law”) requires all franchise agreements to be filed with the Competition Council; failure to do so can result in fines up to 10% of the offending company’s aggregate turnover. However, some agreements may be exempt from filing with the Competition Council. The parties may be exempt from registering with the Competition Council if (1) the parties are competitors in the Romanian market and their cumulative market share is less than 10% of the relevant market; or (2) the parties are not competitors in the Romanian market and their cumulative market share is less than 15% of the relevant market.

Registering with OSIM
Parties seeking to benefit from trademark protection in Romania have three options: (1) registration with OSIM; (2) registration at the EU level as a community trademark; or (3) other international registration which has binding effect in Romania. Trademark licenses authorize a licensee to use the trademark anywhere throughout Romania or only in designated counties and for all or for some of the products or services, for which the trademark has been registered. Such licenses may be either exclusive or non-exclusive. The trademark’s holder may revoke the right to use the trademark by the licensee who is in breach of the provisions of the license agreement.

Third parties are obliged to observe the rights granted to the licensee under the license agreement. Should a third party infringe upon a licensee’s rights, a licensee may seek redress in Romanian courts only if (1) the license agreement is registered with OSIM; (2) the trademark at issue is a community trademark (therefore applicable in Romania); or (3) the trademark at issue is an internationally registered trademark covering Romania. A license agreement that has not been registered with OSIM is nonbinding upon third parties and the licensee who has had his or her rights infringed is without legal recourse.

Franchising in Romania has grown rapidly over the last two decades and new developments are on the horizon. Implementation norms are currently under discussion, with an eye towards strengthening the sanctions to be levied against businesses which fail to comply with the legal requirements described in this article.

Romania has taken many steps to improve the business climate, and now is perhaps the best time to develop a franchise business in Romania. However, building a lucrative business requires more than just good intentions and an initial agreement; it also requires a sound knowledge of the law and constant attention to the agreement’s implementation.