Franchising in Romania:
New Opportunities in a Growth Market |
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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. |
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Elements of the Franchise Agreement |
A thorough review of Romania’s franchising laws is beyond the scope of
this article. Rather, this article is intended to provide a general
overview of the most significant elements found in most franchising
agreements. 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:
- the franchisor is required to hold and develop a commercial
business for a reasonable period of time prior to launching a
franchising network;
- the franchisor must be the holder of the applicable intellectual
property rights; and
- 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:
- the franchisee must develop the franchise network and maintain
the franchisor’s brand and reputation;
- the franchisee must provide regular financial reports to the
franchisor in relation to the franchised business;
- the franchisee must not disclose any confidential information to
third parties;
- 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
- 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.
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Specific Provisions in Franchise Agreements |
In addition to gaining an understanding of the major obligations imposed
on the parties to a franchise agreement, prospective franchisors and
franchisees must also have a working understanding of the minutiae of
such agreements. Particularly important provisions include:
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.
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Special Registrations Related To Franchise |
Once the franchise agreement is complete it must be filed with two
different Romanian state agencies, The Competition Council and the
Romanian State Office for Inventions and Trademarks (“OSIM”).
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. |
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Conclusions |
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. |
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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 2016 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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