The Indian Legal & Regulatory Framework – Do We Really Need a Franchising Law?

Mater Franchising is the current fad because it gives the franchisor access to the local environment, reduces investment, requires negligible approvals from the government and allows for the freedom of local workforce recruitment. Due to the current restrictions on foreign companies selling retail, as well as the growing market and thriving urban population, franchising is becoming a popular model for foreign companies looking to enter India. The master franchise agreement allows the master franchisee to establish a business in a territory using the franchisor’s brand and trademark. It also gives the franchisee the rights to manufacture the products according to the franchisors operating guidelines. This arrangement guarantees the franchisor financial returns.

A lot of discussion surrounds the need to enact a specialized law in India to regulate this rapidly growing sector. Before I get into my thoughts, I’d like to share a few lines from an International Institute for the Unification of Private Law report (UNIDROIT), an independent intergovernmental organization of India. It states that the foundation of any successful franchising industry lies in the existence of a “healthy business law environment.” This is defined as one that has a general legislation on commercial contracts with adequate company laws, which includes intellectual property rights and can be enforced. These are the key characteristics of India’s legal environment, which is evident in India’s growing international franchise relationship.

Let’s first look at the key issues/concerns that a franchising agreement can lead to potential disputes between the parties. Then we will see how these can be protected under current Indian legislation.

(1) Licensing of Intellectual Property Rights and Use: All franchising agreements include some form of IP rights. This could be a license of a trademark/service marks/trade name or copyright or a patent, invention, design, or trade secret. Franchisors are concerned about how the IP rights will be used and whether they can be misused. Some disputes arise in the implementation of the franchise agreement. These include the scope and purpose, geographic scope, confidentiality, protection of confidentiality and the extent of the transfer of know-how. Post-termination issues can also arise. These include the unauthorized use and limitation of trademarks after termination, the disposal of pending inventories (in which case the inventory could be wasted), destruction of stationary containing trademarks/tradenames, and the return or cessation of IP rights. India already has many IPR laws, including the Trademark Act of 1941, Copyright Act of 1957, and the Patent Act. These laws provide extensive protection and enforcement mechanisms for intellectual property rights, including mandatory and permanent injunctions against passing off and infringement. India is a signatory of several international conventions on intellectual properties rights, including the Agreement on Trade Related Aspects of Intellectual Property Rights. This provides protection for trademarks and brand names as well as copyrights and designs of foreign franchisors. Indian service marks are also recognized and protected. This allows the foreign franchisors to license their mark to a franchisee in order to offer the services that are synonymous with him to Indian consumers. Recent amendments to IPR laws were made to comply with TRIPS exclusive rights obligations. The laws are now compliant with international standards for IPR protection. Indian courts are sensitive and proactive in enforcing infringement actions. It is evident that it is not the lack of IPR laws and their enforcement that can lead to potential disputes. Instead, it is the inability to negotiate and carefully draft agreements between franchisors and franchisees related to IPR issues. This could lead to IP-related litigations.

(2) Obligations of Franchisor & Franchisee: This is a crucial issue that could lead to disputes between the parties. These include the implementation of franchisee’s obligations, such as the duty and services rendered by the franchisee and the investment and infrastructure required to support it.