Implementing a solid franchise foundation

May 23, 2019 | 15:00
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After rapid expansion, the franchising market in Vietnam is expected to continue upwards over the next few years with its increased involvement in free trade agreements. Ted Ginsburger, legal consultant at IPMAX Law Firm, offers analysis into how Vietnam goes further in simplifying access to its market for international investors.
implementing a solid franchise foundation

Vietnam did not provide a comprehensive legal framework for franchising until 2006. Even though examples of American gas station franchises could be found before 1975, businesses only really started to develop here from the mid-1990’s in the food and beverage domain with brands such as KFC or Lotteria. In absence of specific regulations, franchises were mostly implemented though agreements such as trademark licences and tech transfer agreements.

The 2005 Commercial Law No.36/2005/QH11 provided basic regulations related to franchising but it was only with the issuance of the following year’s Decree No.35/2006/ND-CP detailing implementation of the law, and Circular No.09/2006/TT-BTM guiding commercial registration that Vietnam provided a rather comprehensive regulation related to franchising.

Decree 35 did not however provide a clear definition of agreements. Even though the Commercial Law gave a general definition, more specifications in Decree 35 would have prevented ambiguities, in particular in regards to the distinction between franchises, distribution agreements, and licence agreements.

As franchising business develops in this country, new regulations tend to facilitate access to the market.

From the adoption of Decree 35 to today, the number of registrations has grown steadily and fast. Since 2007, the Ministry of Industry and Trade (MoIT) has granted 213 franchise licences to foreign companies, with a peak of 32 in 2017. Local brands also followed this trend through examples such as Highland Coffee, Trung Nguyen Coffee, and Thai Express.

More than 50 per cent of the franchises are in the domain of food and beverages, representing around 15 per cent of GDP, and is expected to grow by around 11-12 per cent over the period of 2018-2022. As the food and beverage market grows, experience reminds investors to take into consideration cultural and local circumstances to adapt products. Other fields are now opening and franchise opportunities are now developing in a growing range of sectors such as education, accounting services, entertainment, healthcare and nutrition, fashion, beauty, children’s services, and retail.

Vietnam is ranked ninth out of the 12 most valuable markets for international expansion identified by the International Franchise Association (IFA). Having the lowest GDP among this ranking, and the lowest gross national income (GNI) per capita, Vietnam however justifies the rank by its population size, which is nearly 100 million, including 65 per cent under 30 years old, and the fast rise of the middle class and of its incomes.

While the unemployment rate is low, the minimum wage has augmented of 28.1 per cent from 2008 to 2018, and is expected to continue to increase. The International Trade Administration (ITA) of the US Department of Commerce describes the franchising model as popular and well-suited to a developing country like Vietnam.

According to the ITA, “the culture of entrepreneurship is ideally suited to franchising as it provides investors with a relatively rapid avenue of entering business with controlled levels of investment and at a reduced risk. Rising incomes and an emerging middle class are generating an increase in consumer-driven sectors.”

Foreign investors who are eager to invest in Vietnam are now looking for new regulations, hoping for simplified procedures and an easier access to the Vietnamese market.

Streamlining regulations

In January 2019’s Resolution 02/NQ-CP, the government reaffirms its determination to continue to annul and simplify the regulations on the business environment and to fully implement the measures for reforming the business environment which were issued in 2018. Among regulations adopted last year, Decree No.08/2018/ND-CP, issued by the government in January 2018, appeared to ease many requirements for franchising. However, there is still confusion regarding the requirement for foreign franchisors to register their activity with the MoIT.

Suggested by the MoIT in its Decision No.3610a/QD-BCT issued in 2017, the simplification of requirements, and in particular the removal of registration obligation for agreements, was expected by many investors. This particular issue was also raised as local franchisors were exempt from registration procedures by 2011’s Decree No.120/2011/ND-CP, amending and supplementing administrative procedures in a number of decrees detailing the commercial law.

Decree 08 specifically amended Article 5 of Decree 35 regarding conditions for the franchisor by removing the requirement to register activity as one of the conditions to franchise a business in Vietnam, so that it appeared that the only condition remaining is that the business has been in operation for at least one year. However, it was still ambiguous because Decree 08 did not abolish other provisions of Decree 35, particularly Article 17 regarding registration. It appeared that foreign franchisors are still required to register their franchising activity with the MoIT.

Regarding registration, the latest regulations in order to comply with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) also have direct consequences in regards to trademark licence contracts related to franchises agreements.

Simplifying licensing

The licensing of intellectual property rights (IPRs) in the franchising contract is governed by industrial property law. According to Article 10 of Decree 35, the licensing of such industrial property rights may be established into a separate section in the franchising contract. However, in concern to IPRs related to a franchise agreement, it is usual to establish a separate licence agreement.

In coherence with the current objective of the Vietnamese government to simplify business requirements, and in order to comply with the IP related provisions of the CPTPP, the National Office of Intellectual Property (NOIP) issued Notification No.1926/TB-SHTT in February 2019 which stated that trademark licence agreements are valid without recordal. In other words, trademark licence agreements no longer require to be recorded with the NOIP.

The draft law amending provisions in the IP law, which is scheduled to be presented to the National Assembly this month, includes this modification. Except for trademarks, all other industrial right licence contracts remain effective to third parties only upon registration with the NOIP.

Under the current regulations, IPRs relating to the franchising business should be included in the franchise description document to be provided in advance to the franchisee by the franchisor as part of its disclosure obligation. Particularly, pursuant to Article 8.1 of Decree 35, the franchisor must supply a written introduction of its franchising to the intended franchisee at least 15 working days before signing the contract.

Circular 09 specifies that introduction of commercial franchising shall include the details of brand names, services, and rights to intellectual property objects registered under the laws of Vietnam. Therefore, it may be advisable for foreign investors, prior to franchising their brands, to register their IPRs in the country.

Even though regulations need to be perfected in order to ensure better and easier access to the market, Vietnam offers to investors a rather comprehensive legal framework for franchising, which will likely continue to be further simplified. The economic development of the country, along with the business perspective it carries, are likely to confirm the expansion of the franchise model for foreign and local investors in Vietnam.

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