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13 July 2020

Inconsistency conditions of franchise agreement

According to Article 1027 of the Civil Code of the Russian Federation:

1. Under a franchise agreement, one party (copyright holder) is obliged to provide the other party (user) for a fee for a period of time or without specifying a period of time, the right to use a set of exclusive rights belonging to the copyright holder in the user's business, including the right to a trademark, service mark, as well as rights to other objects of exclusive rights stipulated by the contract, in particular for a commercial designation, production secret (know-how).

2. The contract of franchise provides for the use of a set of exclusive rights, business reputation and commercial experience of the copyright holder in a certain amount (in particular, with the establishment of a minimum and (or) maximum amount of use), with or without indication of the territory of use in relation to a certain area of ​​entrepreneurial activity (sale of goods received from the copyright holder or produced by the user, the implementation of other trading activities, the performance of work, the provision of services).

3. Parties to a franchise agreement may be commercial organizations and citizens registered as individual entrepreneurs.

4. The rules of Section VII of this Code on the license agreement shall apply to the contract of franchise, if this does not contradict the provisions of this chapter and the substance of the contract of franchise.

On the one hand, regarding the franchise agreement which is so popular in recent years, there is a huge number of various comments and clarifications. On the other hand, in practice there are often situations when the parties to a concession agreement have a lot of questions regarding this or that condition, the ambiguity of its understanding and interpretation after signing it. These issues concern both the subject of the contract and other essential terms. Such ambiguity threatens not just inconvenience for the parties, this legal uncertainty may make it impossible to register the granted right, and as a result, the rights under this DCC will be considered not granted.

With regard to the uncertainty of the subject matter of the contract, it is one of the most common situations at the request of users of the concession.

With regard to registered objects such as trademarks and patents, the situation is a little easier, in the contract we simply refer to the certificate number. But the matter of non-registered objects is much more complicated. I would like to touch upon the moment when the subject of the contract includes such an object of intellectual property as know-how. Based on practical experience, specifically in relation to this object, users of the concession have a lot of questions. If the complex of granted rights includes know-how, then taking into account all the features of this object, its detailing is necessary.

According to Article 1465 of the Civil Code of the Russian Federation:

The secret of production (know-how) is information of any nature (production, technical, economic, organizational and other) on the results of intellectual activity in the scientific and technical field and on the ways to carry out professional activities that have real or potential commercial value due to the absence of recognition to third parties if third parties do not have free legal access to such information and the holder of such information takes reasonable measures to maintain their confidentiality, including by introducing a trade secret regime.

Information, the mandatory disclosure or inadmissibility of restricting access to which is established by law or other legal act cannot be recognized as a production secret.

Despite the necessity of suspense of this object to third parties, an understanding of its contents by the user is obligatory. In a number of cases when there was uncertainty regarding this object according to the results of signing the contract, information of a completely different order was transmitted. And the reason for this may be both the “negligence” of the copyright holder and his unwillingness to correctly compile and transmit the materials that he has, and in some cases intentional unwillingness and avoidance of the provision of information.

For example, following negotiations and preparation of a franchise agreement, the copyright holder, in addition to the trademark, was supposed to transfer the rights to a “business model” for the provision of services related to the bankruptcy of enterprises and individuals. And in this regard, it is precisely the clearly proposed scheme for the provision of services that would allow the user to carry out business. However, during the negotiations, this model was discussed only in lay terms, without operating documents and as a result of signing the contract and making a lump-sum payment, the user was bitterly disappointed that such a widely publicized amount of commercial information narrowed to such a small document that did not allow comprehensive information about doing business.

There are situations when the process of discussion and signing of the agreement takes so much time that the copyright holder may change plans and, as a result, the know-how information that is so blurred in the agreement that it is sometimes impossible to identify, will be transferred to another company on preferential terms and it will be very difficult for an unlucky user to try to defend his rights proving that this particular know-how was part of the complex that was implied in the contract.

Often, unscrupulous copyright holders plan to conduct business, accepting both lump-sum payments and royalties for providing "imaginary" information. This information is not fully disclosed at the negotiation stage, due to its confidentiality, however the fact that it generally carries commercial value in its use is very, very doubtful. It is most popular among copyright holders of this type to propose for signing a document in the format of a license agreement, i.e. only “know-how” is used in the subject, thereby allowing you to get away from registration and as a result, unnecessary expenses.

Further, after the owner has signed and received all payments from the user, problems begin with the fact that according to the contract he becomes not what he had previously expected. In this situation, I would like to touch upon another issue that arises from the above mentioned problem: the moment of disclosure of sensitive information. On the one hand, a situation may arise when the copyright holder at the stage of negotiations can “declassify” the existing “business model”, and then the user will understand that he can do it himself. In turn, the user after payment and signing the contract can buy a "pig in a poke".

Unfortunately, Russian legislation, in particular Chapter 54 of the Civil Code of the Russian Federation does not regulate the moments concerning the pre-contractual stage, and in particular, the admissibility of the disclosure of certain information of the parties to the future contract.

However, global legislative practice clearly regulates these issues, so the grounds for the release of the copyright holder from the need to disclose certain types of information to the user are clearly defined. And, on the contrary, the list of information that must be disclosed by the parties before signing the contract of franchise is clearly defined.

But returning to our reality we can recommend (especially to users) to take a more thoughtful approach to the issue of signing a franchise agreement and before dreaming of your own successful business carefully study all the documents you can examine and also evaluate the experience of other users. Often unlucky users even after the business based on the signed DCC does not bring any results, suddenly find the same “fellows in a misery”, but I would like all these facts to be analyzed before the start of cooperation.

In other words, be more vigilant and attentive when examining the documents and signing the concession agreement, and we will continue to inform you about the possible difficulties that the parties to the franchise agreement face, based on our numerous practices.

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