Commercial Franchise Information Disclosure Management Measures --Chinese Franchise Regulation

商业特许经营信息披露管理办法

As discussed below, this law came out on the same date as the "Registration Measures", and it similarly contains a few areas of ambiguities, which I am in the process of writing.

MINISTRY OF COMMERCE
OF
THE PEOPLE’S RUBLIC OF CHINA
16TH ORDER 2007

Commercial Franchise Information Disclosure Management Measures has been promulgated during the 6th meeting of the Ministry of Commerce. It shall go into effect on May 1, 2007.

Minister of Commerce

Bo Xi Lai
April 30, 2007

Commercial Franchise Information Disclosure Management Measures

Article One To protect the bilateral rights of franchisors and franchisees, the Disclosure Measures have been promulgated pursuant to the Regulations of Commercial Franchising Operations (“Regulations”).

Article Two The Disclosure Measures apply to all commercial franchising operations inside the People’s Republic of China.

Article Three The affiliated companies in the Disclosure Measures refer to franchisor’s parent company, subsidiaries controlled directly or indirectly by the franchisor who owns either all the stocks or the majority of stocks, or companies controlled directly or indirectly by the franchisor who owns either all the stocks or the majority of stocks.

Article Four Pursuant to the Regulations, a franchisor shall provide written disclosure of information in accordance with Article Five of the Disclosure Measures thirty days before the execution of a franchise contract with a franchisee, and shall provide a prospective franchisee a copy of the franchise contract.

Article Five A franchisor shall disclose the following information:

1. Information regarding the franchisor and the franchise.

(1) The name, mailing address, contact information, registered agent, president, registered capital, operational scope of the franchisor; and information about company directly-operated units, including the total number of units, addresses, and telephone numbers.

(2) A brief introduction of the franchisor’s experience in franchising.

(3) The franchisor’s registration status.

(4) If the affiliated companies provide products and services to franchisees, basic information of such affiliated companies shall be disclosed.

(5) Information about the franchisor’s or affiliated companies’ bankruptcy or applications for bankruptcy.

2. Basic information about the franchisor’s operational resources.

(1) In written form, provide a prospective franchisee with information that can show the franchisor’s corporate name and business resources related to franchising operations, such as registered trademarks, corporate logo and symbols, patents, proprietary technologies, and operational model.

(2) If the above-mentioned operational resources belong to the franchisor’s affiliated company, basic information about the affiliated company shall be disclosed. Meanwhile, the franchisor shall disclose and explain how the franchise system will be dealt with if the contract, between the franchisor and the affiliated company granting the franchisor such operational resources, terminates.

(3) Information about the litigation or arbitration involving the franchisor’s (of its affiliated company) operational resources, such as registered trademarks, corporate logo and symbols, patents, and proprietary technologies.

3. Basic information about franchise fees

(1) The types, amount, standard, method of payment of fees charged by the franchisor and third parties. If such information cannot be disclosed, the franchisor shall state the reasons thereof. If the standards for fees are not uniform, the franchisor shall disclose the highest and lowest fees, and state the reasons thereof regarding such discrepancy.

(2) The conditions for collecting and returning security deposit; time and method of return of such security deposit.

(3) If a fee is required of a prospective franchisee prior to the execution of the franchise agreement, the franchisor shall state in writing the purpose, condition of return, and method of return of such a fee.

4. Conditions and prices of products, services, and equipments provided to a franchisee.

(1) Whether a franchisee must purchase products, services, and equipments from the franchisor or its affiliated company; the price, conditions thereof for such purchase.

(2) Whether a franchisee must purchase products, services, and equipments from suppliers designated (or approved) by the franchisor.

(3) Whether the franchisee may choose other suppliers, and conditions for such other suppliers.

5. Information about providing continuous services to franchisees.

(1) The specific content and method of providing professional training as well as the specific plans of execution of such training. In addition, also provide information about the location, method, and length of such training.

(2) Specific content of technical support; information referencing the table of contents as well as the relevant page numbers of the franchise operations manual.

6. Information about the methods and content of a franchisor’s guidance for and supervision on a franchisee.


[to obtain the full text of my translation, please e-mail me or leave a comment with a request for same.]

The full text of the law in Chinese can be accessed here.

Commercial Franchise Registration Management Measures--Chinese Franchise Regulation

商业特许经营备案管理办法

This new law, yet another importance piece of regulation in the Chinese franchise realm, came into effect on May 1,2007. It was signed into law on April 30, 2007, just one day before the effective date of the Regulations of Commercial Franchising Operations of the People's Republic of China. There seems to have quite a few areas of ambiguity, as does the Commercial Franchise Disclosure Management Measures, which I will post next.

MINISTRY OF COMMERCE
PEOPLE’S REPUBLIC OF CHINA
15TH ORDER 2007

Commercial Franchise Registration Management Measures has been promulgated during the 6th meeting of the Ministry of Commerce. It shall go into effect on May 1, 2007.

Minister of Commerce
Bo Xi Lai
April 30, 2007

Commercial Franchise Regisitration Management Measures

Article One To strength the regulatory management of commercial franchising, and to maintain orders in the franchising market, the Measures have been promulgated pursuant to the Regulations of Commercial Franchising Operations (“Regulations”).

Article Two The Measures apply to all commercial franchising operations inside the People’s Republic of China.

Article Three Relevant departments, in charge of commercial regulations in the Ministry of Commerce, Provinces, Autonomous Regions, and Municipalities, are the proper registration agencies. If franchising operations are within Provinces, Autonomous Regions, and Municipalities, shall register the franchise in the departments in charge of commercial regulations; if franchising operations cross boundaries of Provinces, Autonomous Regions, and Municipalities, the franchise shall be registered in the relevant department of the Ministry of Commerce.

The management of franchise registration shall be implemented in a national network. Franchisors in compliance with the Regulations shall register their franchise through the governmental website: www.mofcom.gov.cn

Article Four Any person or entity has the right to report activities in violation of the Measures to agencies in charge of franchise registration.

Article Five A franchisor petitioning for registration shall provide the following documentation to the registering agency:

(1) A brief introduction of the franchise.

(2) A brief introduction of the distribution of all the franchised units in China.

(3) A copy of the franchisor’s marketing plan.

(4) A copy of the franchisor’s corporate business license or other important documents evidencing eligibility.

(5) A copy of the registrations of the franchisor’s trademarks, patents or other business resources related to the franchising operations.

(6) Documents provided by a commercial regulatory department in a city with administrative districts, evidencing a franchisor’s compliance with Article 7 Section 2 of the Regulations; with respect to company-operated units located outside China, a franchisor shall provide documents evidencing same (including Chinese Translation), which shall be notarized and certified by a Chinese Consulate located in the administrative region as such company-operated units.

The above section does not apply to a franchisor in franchising operations before May 1, 2007, but such a franchisor shall provide a copy of the first franchise agreement executed by both the franchisor and a franchisee inside China.

(7) Sample Franchise Contract.

(8) Table of contents of the Franchise Operation Manual (Must include the page number of each chapter and the total number of pages. With respect to Franchise Operation Manual accessible via franchise system intranet, provide the estimated pages after printing.).

(9) With respect to franchising of services or products subject to pre-approval pursuant to relevant laws and regulations, franchisor must provide documents evidencing such approval by relevant government agency.

(10) Franchisor’s affidavit, signed and sealed by legal agent of such franchisor.

The above-listed items (1) through (3) shall be filled out directly on the website; items (4) through (10) shall be submitted electronically via the website in PDF format.

To get the complete translation, please e-mail me or leave a comment with your address. My e-mail address is：bluo@vernongoodrich.com

To access the complete texts of the law in Chinese, go here.

STARBUCKS v. SHANGHAI COPYCAT

The latest news report out of China marks a sweet victory for STARBUCKS in its legal battle with a Shanghai Coffee house--Shanghai Starbuck Coffee Ltd.

After the Shanghai 2nd Intermiediate Court's affirming its own decision to hold Shanghai Starbuck Coffee liable for trademark infringement and unfair competition on January 4,2007, Shanghai Starbuck hesitated to change its business name as ordered. The court followed through on its order and forced it to change its corporate name. After almost four months of game play, Shanghai Starbuck finally did change its name to "Shanghai Fang Yun Coffee Ltd." (上海芳韵咖啡馆有限公司）

This is yet another unprecedented step in Chinese court's progress in enforcing IP rights in China. The court not only handed down a victory to STARBUCKS but also saw through the actual enforcement of its own orders.

To help readers understand the history of the entire case, the following is my brief of this fascinating IP case in China.


In re STARBUCKS

Parties:
Plaintiffs / Appellees: Starbucks Co. and Shanghai Unified Coffee, Ltd.

Defendants/ Appellants: Shanghai Xing Bake Coffee, Ltd. and Shanghai Xing Bake Coffee, Ltd. Nanjing Road Branch.

Facts:

A. Plaintiffs:
Starbucks Co. registered the name and pictures associated with its trademark “STARBUCKS” in 1996 in P.R. China; it then registered 30 types of products associated with “STARBUCKS” in 1997; and it registered more services and products associated with the trademark “STARBUCKS” in China.

On February 1, 1999, Starbucks Co. first registered the Chinese version of Starbucks—“Xing Bake” [星巴克] in Taiwan, however it did not begin the registration of “Xing Bake” in China until 1998. While waiting for an approval for the registration of “Xing Bake”, Starbucks began its massive advertising with the trademark “STARBUCKS” and “Xing Bake”. In addition, the first Starbucks chain store began operation in Beijing in January 1999.

Starbucks Co. registered the “Xing Bake” [星巴克] trademark on December 28, 1999.

On March 23, 2000, Starbucks entered into a contract with co-plaintiff Shanghai Unified Coffee, allowing it the legal right to use the trademarks “STARBUCKS”, “Xing Bake” [星巴克], and other unregistered trademark.


B. Defendants:
While Starbucks Co.’s application for the trademark “Xing Bake” [星巴克] was pending, the defendants pre-registered the corporate name “Xing Bake” [星巴克] and gained approval. On March 9, 2000, Shanghai Xing Bake Coffee, Ltd. was incorporated, whose principal business is the sale of beverages, western style meals, and retail alcoholic drinks. And it formed its branch office, the co-defendant, on July 1, 2003.

They printed “Starbuck Coffee” on its price list, and they used characters “Xing Bake Coffee” in their store front and advertising billboards.

C. Lawsuit:
The plaintiffs sued the defendants for trademark infringement and unfair competition in the trial court, Shanghai Intermediary Court.

D. Procedural History:
The trial court held that the defendants violated the plaintiffs’ trademark rights and engaged in unfair competition.

On appeal, the Supreme Court of Shanghai affirmed and required the appellants to issue a public apology, pay damages and attorneys fees to the appellees.

On motion to reconsider by the appellants, the Supreme Court again affirmed.

Issues:
1. Whether the appellant’s successful pre-registration of the corporate name “Xing Bake” defeats the appellees’ claim of trademark infringement?

[Holding: No.]

2. Whether the appellant’s usage of the corporate name “Xing Bake” and “Starbuck Coffee” constitute unfair competition?

[Holding: Yes.]

Analysis:

1. Pre-registration of the corporate name “Xing Bake” [星巴克]
a. This pre-registration of corporate name constitutes subjective bad faith because the president of the future company Shanghai Xing Bake Coffee, Ltd. acknowledged to a major Chinese newspaper in 2003 that the trademark and name “Xing Bake” [星巴克] is very famous and the Starbucks Co. has been very successful. So he decided to race the Starbucks Co. to the corporation name registration office.

b. The trademarks “STARBUCKS” and “Xing Bake” [星巴克] have been widely known in China prior to the appellants’ corporate name registration.

c. Starbucks Co.’s usage of and attainment of relevant rights to “Xing Bake” [星巴克] are earlier than Shanghai Xing Bake Coffee, Ltd. Further, the appellant’s registration of the corporate name “Xing Bake” [星巴克] with the express knowledge that such registration was inconsistent with rights of others violated Trademark Law of China. And the appellant’s behavior violated the basic commercial ethics—equality, honesty and good faith.

2. Unfair Competition
a. The appellants’ use of “ Starbuck”, although different from the appellees’ trademark “STARBUCKS” constituted a confusion considering prominence and reputation of the appellees’ trademark. In addition, “Starbuck” is the key element of the appelees’ trademark.

b. The appellants’ pictorial emblems—one small circle inside a bigger one, green background color, and two stars embedded inside the overlapped area of the two circles generated confusion with the appellees’ trademark “STARBUCKS” and other registered trademarks.


Brad Luo’s Comments:

1. Why didn’t Starbucks Co. register the Chinese version of “STARBUCKS”-- “Xing Bake” [星巴克] at the same time it did in Taiwan? Why didn’t it register as soon as such a trade name became known in Chinese? It could have avoided all these litigation had it done so.

Coupled with Pfizer’s recent loss in a Chinese court for failing to be the first one to register the Chinese version of “Viagra”—“Weige” [伟哥] (meaning “Great Man”), the Chinese courts are speaking clearly and loudly—REGISTER YOUR TRADEMARKS EARLY, BOTH IN ENGLISH AND CHINESE. Also, it is important to know that the trademark registration regimes in mainland China, Taiwan, Hong Kong and Macau are independent of each other, and that a trademark owner needs to register the mark throughout the Greater China area.

2. It is settled law that China is a “first register first served” jurisdiction with respect to trademarks. However, the Supreme Court of Shanghai mentioned in dicta that Starbucks Co. did use the Chinese version “Xing Bake” [星巴克] first. Does this mean that courts in China will start looking into who first used a trademark or trade name? It is too early to tell. But the safest thing is to REGISTER FIRST!

Heavier Penalties for Violations of the New Chinese Franchise Law

Under the new Chinese Franchise regulation, here are the requirements and penalties for breach thereof:

Article 7---2 Units in Operation for 1 Year

A franchisor shall have at least two directly-operated units under operation for more than one year.

Penalties for Breach of Article 7

Article 24 A franchisor, who is unqualified under Section 2 of Article 7, yet conducts franchising operations, shall be subject to an ordered correction from commerce regulatory authorities, confiscation of profits, a monetary fine between 100,000 and 500,000 yuan, and a public reprimand.

Entities or individuals other than registered enterprises, who conducts franchising operations, shall be subject to an order from regulatory authority to cease illegal operations, confiscation of profits, and a monetary fine between 100,000 and 500,000 yuan.

Article 8---Registration

Article 8 The franchisor shall register a franchising operation with commerce regulatory bodies pursuant to the Regulation within 15 days of its first franchise contract.

Penalties for Breaching Article 8

Article 25 A franchisor, failing to register with appropriate commerce regulatory authorities pursuant to Article 8, shall be subject to an order from such regulatory authorities to register the franchise within a specified time and a monetary fine between 10,000 and 50,000 yuan; if the franchisor fails to register within the specified time, it shall be subject to a monetary fine between 50,000 and 100,000 yuan and a public reprimand.

No doubt that the increase in the amount of penalties is intended to discourage violations of the rules as specified in the new law. However, from the view point of a United States consumer (franchisee), the administrative penalties do not seem too high. Yet at the same, the franchisee is entitled to traditional contract damages if a breach occurred.

If a reader knows whether Chinese contract law allows exemplary damages for a breach of contract in connection with a tort like fraud, please let me know. In the mean time, I will do some research on this topic after my final exams in early May, 2007.

New Chinese Franchise Law Effective Now

As of May 1, 2007, the new Regulations of Commercial Franchise Operations of China is effective.

Coupled with the rush of investments before the 2008 Olympics games in Beijing, this new law is expected to generate a lot franchising activities in China. Read this article in Dallas Business Journal.

Here is a list of the new laws that went into effect on May 1, 2007. (In Chinese only)

The New Chinese Tax Law and Its Ramifications to Foreign Companies

On March 16, 2007, President Hu Jintao signed into law the new Corporate Tax Law of the People’s Republic of China (“New Tax Law”). It will come into effect on January 1, 2008. In comparison with the old corporate tax laws, the new tax law ushers in a unified corporate tax regime and it could have significant impact on both Chinese and foreign companies in China.

I. Legislative History

A. The Old Tax Law

Ever since the beginning of the economic reforms in the late 1970s and early 1980s, China has had a dual taxing system, one for domestic companies, and the other for foreign enterprises. The Interim Corporate Tax Measures of the People’s Republic of China (“Domestic Corporate Tax Law”) governs the taxing of all Chinese companies, withholding a tax of about 33%; while the Foreign Invested Corporation and Foreign Corporation Tax Law (“Foreign Corporate Tax Law”) applies to all foreign corporations, enjoying a tax rate of about 15%. The purpose of the dual taxing regimes is plainly to attract foreign investments, and such a purpose has been well served as China has become one of the world’s top recipients of foreign direct investments. However, the large tax incentive to foreign companies means a large competitive disadvantage to local Chinese companies, and they have been pushing for a change in the “discriminatory” treatment in their own country since the mid 1990s.

B. The New Tax Law

After almost ten years of internal debates and political struggles, the new tax law was finally approved by the National People’s Congress in March 2007 and was signed into law by the President of China. According to Chinese commentators, the new law is meant to balance the country’s continued need for foreign investments and a unified comprehensive tax code under which domestic and foreign companies at least compete on a plain field in terms of taxes. And according to Anthony Fay, a tax lawyer at White & Case’s Beijing office, “this new tax law is timely, and China views the tax code in parallel with the overall direction of where it would like to see the county headed.”


II. Important Changes

The following summarizes the major changes in the new tax law:

a unified corporate tax rate of 25% for both foreign and domestic companies;
a decreased rate of 15% for key high tech industry;
a decreased rate of 20% for small, low profit companies;
a decreased rate for environmentally friendly companies;
a five-year grace period for foreign companies to transition gradually to the 25% tax rate; and
This law does not apply to sole proprietors and partnerships.

III. Impact on Foreign Companies

To many foreign companies in or ready to be in China, the “New Tax Law” might look like “shock and awe” because it requires a hike of a whooping 10% in taxes due to the People’ Republic. Depending on a foreign company’s perspective to the new tax code, however, the “New Tax Law” does not mean all bad news. Quite on the contrary, it might mean new opportunities that a company would not otherwise have.

For example, the “New Tax Law” might incentive a foreign company to expand into other areas of investment opportunities inside China. Since the “New Tax Law” provides a tax break on high tech and environmentally friendly industries, a foreign company may look into bringing in new environment-related technologies into China, thereby taking advantage of the tax break. Furthermore, a foreign company may examine the possibility of expanding its investments into interior China where the local government might provide additional tax incentives taken away by the New Tax Law (Of course, moving to interior China presents logistic challenges. It is the topic of another day.).

IV. Conclusion

Good or bad, the New Tax Law has arrived, and it is the time for foreign companies to strategize on ways to either cope with or take advantage of the new tax code. For most foreign companies with current or future interests in China, the “New Tax Law” does not really offer them with an option to back out of China simply because of the economic importance of the Chinese market itself. Therefore, the “New Tax Law” presents another wrinkle in the many folds of challenges in doing business in a more and more globalized world.

What Foreign Companies Need to Know About Chinese Labor Law

Fast Food Giants in Chinese Hot Water

Kentucky Fried Chicken and McDonalds both grabbed news headlines in China in the last few weeks. This time, they were not noted for their famed fried chicken or burgers; they were in trouble with the Chinese authorities for alleged violations of local minimum wages regulation in the Southern province of Guangdong.

Forbes has an excellent article, reporting the allegations of violations:
A newspaper in the city of Guangzhou had charged that McDonald’s and two chains owned by Yum! , KFC and Pizza Hut, were paying their workers, mainly students, wages as much as 40% below the local minimum for part-timers of 7.5 yuan (97 cents) an hour.

According to provincial labor authorities in charge of investigating the alleged violations, the foreign companies did not violate local minimum wage regulations. But, the companies were cleared only because that the minimum wage protection does not extend to college students, who make up a large portion of the two companies stores in Guangdong province.

Negative Impact

Any PR specialist would probably conclude that the events unfolded in China constitute a PR disaster for the two fast food giants in the local market. And the local market, unfortunately for the companies, is one of the world’s fastest and most important markets for them. Even though they have been cleared for the minimum wage issue, they have not for alleged working hour violations. As the corporate executives in America wait for the other shoe to drop, the damage might have already been done to the companies involved. To the Chinese consumers, the companies look just like what Karl Marx described in his treatise on the cruelties of capitalists, greedy, blood thirsty creatures that suck every ounce of value out of their workers…

To mitigate the negative impact of the bad press, both McDonalds’s and Yum! agreed to more unions in China. The New York Times reported on April 10, 2007 that McDonald’s, following the footsteps of Wal-Mart, gave into governmental pressure and agreed the formation of unions in its 750 outlets in China.

In light of the recent events, foreign companies are likely to remain under scrutiny of both local government authorities and consumers. China Business Blog states that:

The All China Federation of Trade Unions (ACFTU) is planning to get 80 percent of foreign companies to sign up by the end of 2008, and anyone running an MNC in China might want to plan for the day when they knock on the door - and to make sure, well in advance, that the Union rep (or the undercover reporter that precedes him) will not find any low-hanging fruit in which to stew the company at China’s most efficient court – the Court of Public Opinion.

Lessons for McDonald’s, Yum! and Everyone Going to China

1. Know the Chinese Labor Law

Like many other laws and regulations, the Chinese regulations over labor issues are very complicated. The most fundamental piece of legislation is the Labor Law of the People’s Republic of China (“Labor Law”). Chapter Five of the Labor Law sets the standards for wages, and it states as follows:

Art. 48 China hereby institutes a minimum wage protection system. Minimum wage standard is to be determined by the government authorities in provinces, autonomous regions, and municipalities. And such governments shall register minimum wage standard with the State Council.
Employers shall not pay wages lower than local minimum wage standard.

Art.49 When ascertaining and adjusting minimum wage standard, local governments consider comprehensively the following factors:
(1) Employee’s situation and minimum living standard;
(2) Average wage level;
(3) Production rate;
(4) Employment situation;
(5) Economic development differences between regions.

In addition to the Labor Law, the Ministry of Labor Social Security issued the Regulation on Minimum Wage (“Wage Regulation”) in January 2004, which came into effect on March 1, 2004. Wage Regulation states:
Art. Five Minimum wages standard shall apply in two forms, monthly minimum wage and hourly minimum wage. Monthly minimum wage standard applies to full time employees; hourly minimum wage standard applies to part time employees.
Art. Six When ascertaining and adjusting minimum wage standard, local governments consider local minimum living expenses, city and township consumer price index, worker social security deduction and housing deduction, worker average wages, economic development level, and employment situation.

2. Due Diligence

As shown above in the Labor Law and Wage Regulation, local government (on the provincial and similar level) is left with the discretion to set the minimum wage standard. Therefore, minimum wages can differ significantly from province to province. Variations of minimum wage standards could be a source for trouble for foreign companies. Needless to say, both McDonalds’ and Yum had their first rate in-house counsel, large international law firm counsel, as well as local Chinese counsel examine labor regulations in different regions of China. However, somehow, somewhere details still failed them.

In addition to seeking legal counsel, foreign companies need to take additional due diligence measure to avoid brushes with the Chinese authorities, and more importantly bad PR in the Chinese press.

a. Communication with Local Department of Labor and Social Security
Wages Regulation stipulates in Article Four that people’s government above the county level bears the administrative responsibility of enforcing the minimum wage compliance. Therefore, it should serve a foreign company to have a local agent to seek clarification from relevant enforcing government bodies regarding minimum wage standard in specific regions.

b. Union organizations are given a rule in the enforcement of the minimum wage standards in China too. Specifically, union bodies have the legal right to report violation and request enforcement actions from relevant administrative government labor agencies. So, communication and corporation with such union organizations in labor matters such as minimum wages, working hours would also benefit foreign companies.

3. Doing More Than the Minimum

As a direct result of the alleged violations of McDonalds’ and Yum, foreign companies are likely to remain under the microscope for a long time. Providing local employees more than what is the minimum could be a proactive action against possible allegations of wrong doing. Compliance with the law is one matter; provisions beyond minimum local governmental requirement is quite another in that it proactively dispels suspicions of violation simply because working for a foreign company means higher wages (This is actually the overall general impression among professionals in China.). Meanwhile, higher wages and better pay packages will tend to attract top notch Chinese talents.