Development of Franchise Agreements in Colombia from a Legal Point of View
May 29, 2015 QuickCounsel Download PDF
By Dario Cadena, Associate, Lloreda Camacho & Co.
Through a franchise agreement, a franchisor -the owner of a well-known brand and the know-how to operate a successful business- grants to a franchisee the license to use its trademarks and know-how to offer goods or services to consumers, taking advantage or benefiting from the franchisor´s IP portfolio and understanding of the market (see Concept 02085094 issued by the Superintendence of Industry and Commerce hereinafter "SIC" for a detailed definition of the franchise agreement) . The franchisee must pay different fees to the franchisor for the trademark license and the authorization to operate with its know-how. Typically a franchisee must pay (i) an entrance fee, (ii) a royalty, and ancillary fees that the parties agree upon, like, for example, advertisement fees (where the parties agree that the franchisee will pay a percentage of the business profits in consideration for the advertisement to be used in the franchisee's establishment).
In Colombia, franchise agreements are not explicitly regulated by law, which means that the contract terms will govern the rights and obligations of the parties. Notwithstanding the absence of specific rules, under Colombian law, there are general provisions that limit some of the clauses that the franchise agreement may contain. The applicable provisions will be explained herein as well as the requirements that have to be fulfilled for a franchise agreement to be deemed as valid and enforceable in Colombia.
Trademark and Know-How Licenses
As mentioned above, one of the most relevant aspects of the franchise agreements is the trademark license. In Colombia the regulation for patents, trademarks and other distinctive signs can be found in the Andean Community decision 486 of 2000. According to article 154 of the aforementioned decision, the exclusive right to use a trademark will be acquired when registered before the competent authority. In Colombia the authority responsible for the trademark registry is SIC. Registering a trademark prevents third parties from using it for their own benefit, as explained by SIC's Concept 01010101. Once registered, a trademark may be licensed. The usual term for which licenses are granted cover a period of ten (10) years, however the parties are free to agree to the term they see fit, as long as the trademark registry is duly kept for the entire period of the license and the license itself is filed in SIC's registry. Regarding the transference of the know-how associated with the franchise, the parties have to clearly identify, in the franchise agreement, which technology and technical assistance will be provided by the franchisor. It is not uncommon for the franchisor to offer training and even periodical supervision to ensure the proper development of the business. It is important to keep in mind that, when technical assistance and technology is going to be licensed to a Colombian franchisee, and the franchisor is domiciled in a foreign country, Decree 259 of 1992 requires that the agreement be filed before a registry kept by International Commerce Division of the Ministry of Commerce, Industry and Tourism (hereinafter "MINCIT"). The registry of the agreement has to follow the procedures set forth by MINCIT's Circular letter of July 13, 2009.
In order to properly protect the business know-how, confidentiality clauses are included in all franchise agreements, so that it is clear for the franchisee that all the information given to him by the franchisor must not be disclosed to third parties without proper authorization. It is not uncommon for confidentiality clauses to outlive the term of the franchise agreement, ensuring non-disclosure of know-how even after the agreement has ended. According to article 246 of Decision 486 of the Andean Community, when an agreement involves technical knowledge or providing technical assistance, it is permitted for the parties to enter into confidentiality clauses to protect proprietary secrets, as long as those clauses do not excessively curtail competition.
Any prospective franchisor should be aware that agreements that restrict competition are prohibited in Colombia (the Colombian Constitution states in article 333, that any act that obstructs free competition is prohibited). Law 155 of 1959 , Law 1341 of 2009 and Decree 2153 of 1992 comprise the framework of the Colombian antitrust regime and prohibit (i) collusive agreements between competitors, (ii) certain unilateral conducts that curtail competition and (iii) the abuse of dominance (certain unilateral conducts that curtail competition carried out by a firm with market power). Hence, when drafting a franchise agreement in Colombia, the Franchisor should be very careful on the language used, because if a clause is deemed to restrict free competition, not only will it be voided but may also expose the parties to large fines.
This does not mean that reasonable clauses designed to protect the franchisor's trademarks, know-how and goodwill cannot be used in Colombia. However, as stated before, the clauses have to be carefully drafted to avoid the risk of them being characterized as unreasonable restrains on trade.
Franchise Agreements and Other Agreements
Because of the nature of the franchise agreement and taking into account that it is not specifically defined by Colombian law, it is possible that, despite the parties' best efforts during negotiations, the contract entered into by the parties is understood not to be a franchise agreement, but a contract of a different type. The risk in this event resides in the fact that rules governing other type of agreements may create rights and obligations to the parties which they did not intended to grant. The agreements that could be similar to a franchise agreement are the Distribution, concession and commercial agency contracts. For this reason it is important for franchisors as well as franchisees to properly define a franchise agreement by agreeing to (i) license a trademark, (ii) transfer know-how, (iii) establish that all the information is the property of the franchisor, who will transfer it and provide technical assistance -if this is the case-, in return for (iv) a fee (an entrance fee, royalty payments and advertisement payments as applicable).
The major differences between the franchise agreements and the distribution agreement are that, in a distribution arrangement, there is no transfer of know-how or technical assistance, there is also no trademark licensed nor are there payment of royalties based on the profits of the business. As for the concession agreement, the key differences with franchises are that there is no transfer of know-how, and no trademark is licensed. The relevant differences between the franchise and commercial agency agreement are that the agent works independently but for the benefit of the principal, with the objective of promoting the principal businesses, while, in the franchise agreement, the franchisee operates its own business on his own interest, albeit, with the assistance of the franchisor and in compliance of the general terms as outlined in the franchise agreement.
The Franchise Agreement Content
As mentioned above, properly drafting the franchise agreement is important. It is recommended for these agreements to clearly define the purpose of the contract so that it is clear that it involves both the licensing of a trademark and the transfer of the know-how required to run the business. The agreement should also state whether exclusivity has been granted to the franchisee, and the rights and obligations of both parties including those relating to the payment of the franchise fees. If technical assistance and training is to be provided, the scope should be precisely defined. If confidentiality, intellectual property protection, anti-corruption provisions and post contractual obligations are agreed they should be reviewed to ensure that they meet Colombian law enforceability requirements. We should also note that including an arbitration clause is highly recommended in general and mandatory should the parties which to include a valid choice of law provision –different from Colombian law- allowing for foreign law to govern the agreement (in that case a valid international arbitration clause has to be executed by the parties).
Key Issues to Keep in Mind
As stated before, franchise agreements are not subject to specific rules in Colombia. Hence the parties have great freedom to frame the terms of the agreement so that it accurately reflects their specific needs. However, the lack of regulations can lead, as discussed above, to the agreement being characterized as something other than a franchise contract and, therefore, there are issues that need to be included in a franchise agreement, such as the licensing of IP, the transference of know-how and the payment of a fee.
It is also of great importance to include detailed provisions dealing with the transfer of know-how, to ensure the proper use of the information and protect the franchisor rights not only for the duration of the agreement but also once the contract terminates. The franchisor should be diligent in reviewing its IP portfolio to ensure it is properly registered and protected in Colombia.
Under Colombian law, there are no specific provisions governing franchise agreements. This allows for tailor made agreements but also raises some concerns due to the lack of regulation. However, the lack of regulation in this type of agreements allows the parties to agree on their best interest, taking into account that they create their own legally binding agreement where there are many possibilities for the parties to contract in respect to the matters and interests they may have. Hence, it is of utmost importance for the parties entering into a franchise agreement to be very careful with the clauses they incorporate in the contract and the meaning they attach to them, so that (i) the contract can be properly enforced and (ii) the nature of the agreement is not confused with other types of agreements that can have similarities with it.
About the Author
Dario Cadena, Associate, Lloreda Camacho & Co.
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