China’s Legal System Must Be Considered in Interpreting Franchise Law

This post was written by Peter Reap, editor of CCH Business Franchise Guide.

When translating and interpreting China’s laws and regulations applicable to franchising, the structure of China’s legal system must be kept in mind, Toronto franchise attorney Paul Jones writes in his recent article, China’s Franchise Laws: Cases and Commentaries. China has adopted a civil law model in which broad principles are set out in laws of general application and the decisions of courts do not have precedential value.

China’s general Contract Law, which became effective in 1999, and its Measures for the Regulation of Commercial Franchising (CCH Business Franchise Guide ¶7065), which became effective in 2005, both require pre-contractual disclosure. Examining third-party translations of both laws and providing his own translation of the disclosure obligations imposed by the Measures, Mr. Jones alerts franchisors that the list of disclosure obligations in the Measures is not intended to be exhaustive. In several places, the list requires the disclosure of what is best translated as “similar information.”

One of the first decisions by a Chinese court to review a franchisor’s failure to make disclosures required by the Measures is Haiyan v. Beijing Hansen Cosmetology Ltd. Co. (Beijing Chaoyang District People’s Court, 2005). The franchisee of a cosmetics shop business had paid a franchise fee of approximately $22,000 to a franchisor, but subsequently discovered that the franchisor’s trademark was not registered; that the franchisor’s brand was not, as had been represented, an international brand; and that there were undisclosed problems in product supply. The court noted that the Measures required written disclosure of basic information and found that the franchisor had intentionally violated its disclosure obligation.

In its analysis of the purpose of the Measures, the court determined that a violation of the disclosure obligation constituted fraud. Citing provisions of China’s Contract Law, the court declared the parties’ agreement to be lacking in fairness, rescinded the agreement, and ordered the return of the franchisee’s money.

Court decisions holding franchise agreements invalid due to the franchisor’s lack of necessary qualifications are currently more common than decisions ordering rescission for a failure to disclose, Mr. Jones observes. Article 7 of the Measures sets out the qualifications required for a franchisor to operate in China. While foreign commentators have focused on the barrier to entry posed by the requirement of having operated two locations in China for at least one year, Chinese commentators have focused on whether the foreign franchisor is duly organized under China’s laws and regulations to offer franchises, the author concludes.

The full text of the article, China’s Franchise Laws: Cases and Commentaries, appears at CCH Business Franchise Guide ¶7068.

British Columbia May Introduce Franchise Bill

The government of British Columbia, Canada’s third largest province, is apparently considering introducing franchise legislation, according to Toronto franchise attorney Paul Jones.

“At this stage, they appear to be gathering information and considering options,” Jones reported. “There does not appear to be a draft bill yet or a consultation on paper, but they are making serious enquiries.”

Currently, three other Canadian provinces have franchise laws—Alberta, Ontario, and Prince Edward Island. In addition, the Uniform Law Conference of Canada has adopted and recommended enactment of a uniform franchise disclosure law and regulations governing disclosure documents and mediation of disputes. Further information on Canadian franchise laws appear at CCH Business Franchise Guide ¶7020.

Six Foreign Jurisdictions Adopt Franchise Laws in 2006

It’s been conventional wisdom for a decade that international franchising is in a period of rapid growth, as franchisors cross borders to reach new markets. In many countries, the law affecting franchising has been a step behind the business realities. However, recent legal developments appear to be catching up in a hurry.

During the last 10 months, six foreign jurisdictions have adopted franchise laws or regulations, bringing the number of jurisdictions specifically regulating franchising to 23. The latest countries joining the list are Vietnam, Belgium, and Sweden.

Vietnam enacted a broad franchise disclosure/registration and relationship law, as well as adopting detailed implementing regulations. The law, effective January 1, 2006, requires franchisors to register with the Ministry of Trade prior to commencing franchising and to provide a prospective franchisee with a copy of the franchise agreement and a “franchise description document” at least 15 days prior to the execution of a franchise agreement. The law also imposes restrictions on the franchisor’s right to terminate a franchise and provides procedures for the assignment of a franchise.

Belgium adopted a statute that requires franchisors to provide the prospective franchisee with a two-part disclosure document at least one month prior to the execution of an agreement or commercial partnership with a franchisee. If any one of the required disclosures is not made, the franchisee may nullify the parties' agreement within two years of its execution. The law became effective February 1, 2006.

The Swedish Parliament passed the "Law on the Duty of a Franchisor to Provide Information" (Law No. 2006:484) in May 2006. It came into force on October 1, 2006, and governs agreements executed on or after that date. The law is strictly a disclosure law and does not govern the franchise relationship. It requires a franchisor to provide specific information to a prospective franchisee in "ample time before a franchise agreement is entered into." The law provides for a right to seek injunctive relief against a franchisor that fails to comply.

This flurry of legislative activity followed a relative slow period of franchise law enactments in the early part of this decade. The first active period for foreign franchise laws was in the mid-to-late 1990s.

All the foreign franchise laws and regulations appear in CCH Business Franchise Guide, the only resource that publishes global franchise laws in official and unofficial English translations.

Spammer’s Felony Conviction, Nine-Year Prison Sentence Upheld

The conviction of an e-mail marketer under the “anti-Spam” provisions of the Virginia Computer Crimes Act survived constitutional attacks that the statute violated the First Amendment, breached the Dormant Commerce Clause, and was unconstitutionally vague. Thus, the Virginia Court of Appeals upheld a jury conviction under the “anti-Spam” statute and a nine-year prison sentence.

The Virginia Computer Crimes Act provides that a person who intends to falsify electronic mail transmission or routing information in unsolicited bulk e-mail commits a Class 6 felony if the volume of the transmission exceeds 10,000 attempted recipients within any 24-hour period, 100,000 attempted recipients in any 30-day period, or one million recipients in any one-year period (http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-152.3C1).

On three occasions in July 2003, the marketer used computers in his home in North Carolina to send a combined 55,000 unsolicited bulk e-mails with falsified routing and transmission information to subscribers of AOL, which has servers located in Virginia. Based on this evidence, and the seizure of compact discs containing at least 176 million stolen e-mail addresses, a jury convicted the marketer of three counts of violating the “anti-Spam” statute.

On appeal, the marketer contended that the Virginia “anti-Spam” statute was overly broad in violation of the First Amendment. However, the court held that the statute did not proscribe speech; it merely proscribed intentional falsity in the massive, uncompensated use of the private property of an electronic mail service provider. The statute could not be overly broad because no protected speech fell within its scope.

Contrary to the marketer’s claim, the statue did not violate the Dormant Commerce Clause on the theory that the Act regulated transactions outside Virginia's jurisdiction. Generally, a state statute passes constitutional muster if it regulates evenhandedly to effectuate a legitimate local public interest and its effects on interstate commerce are only incidental. It was unquestionable that anti-spam laws promoted local interests. America Online, whose users received the bulk e-mails, expended significant resources in an effort to protect its private property from spammers and to shield its subscribers from spamming.

The court held that statute was not constitutionally vague. The word “unsolicited” had a practically universal definition. An e-mail is “unsolicited” if the recipient neither requested nor consented to receive such e-mails and if the sender and recipient had no preexisting business or personal relationship. A contention that “bulk”' was a vague term also failed because the law specifically stated how many attempted recipients may be solicited within particular periods of time.

The decision is Jaynes v. Commonwealth of Virginia, Court of Appeals of Virginia, Alexandria, Record No. 1054-05-4, September 5, 2006. The opinion is scheduled to appear in the October 31 report of the CCH Advertising Law Guide.

Term Starts with Three Antitrust Cases Set for Review

Following a term in which it decided four antitrust cases, the U.S. Supreme Court started its October 2006 Term having granted review in three antitrust cases, with several other interesting petitions still in play.

In Bell Atlantic Corp. v. Twombley, the Court will review a Second Circuit decision (2005-2 TRADE CASES ¶74,951) that the customers of a telecommunications company did not have to plead so-called “plus factors” to sufficiently allege that telecommunications providers conspired to refrain from competing against one another. Defendant Bell Atlantic questioned whether the customers had stated a claim under Section 1 of the Sherman Act by merely alleging that the company engaged in parallel conduct and participated in a conspiracy—without including any allegation that would establish the existence of a conspiracy under the applicable legal standard.

The Federal Trade Commission and the Department of Justice submitted a joint brief in favor of Bell Atlantic, arguing that the Federal Rules of Civil Procedure require that a complaint allege enough facts to place a defendant on notice and that specificity in pleading is particularly important in a Section 1 Sherman Act action. Claims of parallel conduct, together with bald allegations of conspiracy, are insufficient to state a claim under Section 1, according to the agencies. The Court granted review on June 26. Oral argument is scheduled for November 27.

In another case—Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc—the Court will consider a decision of the Ninth Circuit (2005-1 TRADE CASES ¶74,817), upholding a jury verdict of monopolization and attempted monopolization by lumber products giant Weyerhaeuser Co. The appeals court held that the standard for a predatory pricing claim articulated by the Supreme Court in Brooke Group Ltd. V. Brown & Williams Tobacco Corp. (1993-1 TRADE CASES ¶70,277) did not apply to a case that alleged “predatory bidding” in violation of Section 2 of the Sherman Act. The Brooke Group decision maintained that a plaintiff asserting predatory pricing must prove that the defendant suffered a short-term loss from the pricing and had a dangerous probability of recouping its loss through “supracompetitive” pricing after the elimination of competition. The appeals court upheld instructions that allowed a jury to find a Section 2 violation based on factors such as “fairness” and “necessity.”

Again the Federal Trade Commission and Department of Justice submitted a brief in favor of the defendant, contending that “competitive bidding” was analogous to “competitive pricing” and therefore the Brooke Group standards should apply. Certiorari was granted on June 26. Oral argument is scheduled for November 28.

The third case involves a patent licensee’s antitrust claim against the patent owner for extending control of the invention through a settlement agreement with a competitor. In MedImmune, Inc. v. Genentech, Inc., the Federal Circuit held that the interference settlement between competing biotechnology companies was not per se or presumptively illegal under the Sherman Act (2005-2 TRADE CASES ¶74,972). The court ruled that application of a per se illegality standard would discourage—if not prevent—settlements, placing unnecessary burdens on the courts and the Patent and Trademark Office (PTO). Moreover, the per se or presumptive illegality urged by the licensee for interference settlements was contrary to both precedent and policy, as recorded in the Department of Justice/FTC’s Antitrust Guidelines for the Licensing of Intellectual Property (http://www.usdoj.gov/atr/public/guidelines/0558.htm). In addition to the antitrust claims, the licensee had alleged fraud on the PTO, which was rejected for failure to meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure.

The petition for review questioned whether a patent licensee is required to refuse to pay royalties and materially breach a license agreement before bringing suit to declare the patent invalid, unenforceable, or not infringed. The Supreme Court granted review of the decision on February 21. Oral arguments were held on October 4.

This activity is a continuation of a trend from the October 2005 Term, one of more active terms in recent years. During the last term, the Supreme Court handed down antitrust decisions on the topics of tying arrangements ( Illinois Tool Works Inc. et al. v. Independent Ink, Inc., 2006-1 Trade Cases ¶75,144); joint venture pricing (Texaco Inc. v. Dagher, 2006-1 Trade Cases ¶75,143); attempted monopolization (Unitherm Foods Systems, Inc .v. Swift-Eckrich, Inc., 2006-1 Trade Cases ¶75,100); and price discrimination (Volvo Trucks North America, Inc.v. Reeder-Simco GMC, Inc., 2006-1 Trade Cases ¶75,077).

Why a Trade Regulation Blog?

When I started writing about antitrust and trade regulation law in 1981, my contact with practitioners was limited to my words on the page, networking at legal conferences, and the occasional letter or telephone call. Some lawyers, hearing through the grapevine about a particularly important court decision, would call to request that we mail out a hard copy to them. We were happy to use any method of communication available.

As time went on, we adapted to new media and technology. In 1997, we provided the Trade Regulation Reporter and Business Franchise Guide on CD-ROM and added RICO Business Disputes Guide soon thereafter. Three years later, we launched the publications on the web, through the CCH Internet Research Network. A few years ago, we started “pushing out” electronic versions of the Trade Regulation Reports weekly newsletter by e-mail.

Surveying the communications landscape, a blog appeared to be the next logical step to connecting with our customers and colleagues. A blog will enable us to post news in real time and receive responses almost immediately. The casual nature of a blog will allow us to comment more informally about policies and trends and will facilitate discussion among practitioners, government enforcers, students, and scholars.

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