Commercial Franchise Administration Regulation

March 1, 2007 - by Lily

The long-awaited Commercial Franchise Administration Regulation ("Regulation" ) was issued by the State Council on February 6, 2007 and will come into force as of May 1, 2007. The Regulation applies equally to foreign-invested franchisors and domestic Chinese franchisors. That is to say all commercial franchise activities within the territory of the People's Republic of China will be subject to the Regulation.

1. What is 'commercial franchise'?

The term 'commercial franchise' ("Franchise" ) as mentioned in the Regulation means that a franchisor, who owns business resources, such as registered trademark, enterprise logo, patent, know-how, etc., licenses or empowers a franchisee to use such business resources by signing a contract, and the franchisee should conduct the business in the uniform commercial mode as agreed in the contract and pay franchise fee to the franchisor.

2. The requirements of the qualification of a franchisor:

(i) The franchisor shall be an enterprise rather than a natural person.
(ii) The franchisor is capable to provide long-term business guidance, technology support and training services to the franchisee.
(iii) The franchisor shall have at least two direct-operation stores and its operation term should exceed one year when it conducts Franchise.

3. Information disclosure:

A franchisor shall provide authentic and accurate basic information and other materials concerning the franchised business operations and the text of franchise contract in written form 30 days before signing a formal Franchise contract. The basic information shall be disclosed by the franchisor include name, domicile, registered capital, business scope, IP rights, the involvement in lawsuits, etc.

4. Put on records:

The franchisor shall file the Franchise for records at the competent commercial authority of the PRC in 15 days since signing a formal Franchise contract for the first time.

5. The obligations the franchisee:

(i) The franchisee shall not license the Franchise to any third party without the consent of the franchisor.
(ii) The franchisee shall not disclose, use or allow others to use the franchisor's business secrets without the consent of the franchisor.

6. The Franchise contract:

(i) A Franchise contract shall be signed in written form, and shall include the necessary content.
(ii) The franchisee may terminate the Franchise contract unilaterally within certain period upon execution of such contract.
(iii) The Franchise term should not be less than three years unless the franchisee agrees otherwise.

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