Unscrupulous Franchises

First, it must be said that no such concept as a “franchise” exists in Russian law. Rather, in civil law, the concept of a commercial concession agreement is spreading in popularity.

A significant term in such an agreement is the transfer of the right to use a particular trademark/service mark. If the scope of the agreement does not reflect this (for instance, the company is lacking a trademark or service mark), such an agreement consequently does not constitute a commercial concession. This is true even when only exclusive rights are being transferred, for instance of a commercial designation or product secrets (know-how).

A commercial concession agreement is not subject to state registration in the Russian Agency for Patents and Trademarks. The transfer of the right to use a scope of exclusive rights is subject to registration.

When choosing a franchise, always keep in mind that it is not in the franchise owner’s interests to make you rich. The main reason the franchisor company offers you a franchise is to extract income from you. With that in mind, always be sure to study any agreement provided for you to sign very carefully. Be sure to order the services of a lawyer BEFORE signing it, not after!

One can understand based on the terms of an agreement how conscientious the company offering the franchise is.

Cases from our practice:

A client contacted us seeking assistance in getting back money they invested in a franchise. In his opinion, the franchisor had egregiously violated the terms of the agreement. The franchise didn't yield the volumes of income that were declared in the agreement, didn't provide the number of employees stated in the agreement, didn't provide sales training to the employees, and the program that the franchisor provided had interruptions sometimes.

After studying the terms of the agreement, it turned out that the user had to fulfill a huge amount of the obligations to be able to reach the level of income stated in the agreement.

In our conversation, the user said that he didn't fulfill the agreement obligations since he believed that to be a mere formality. He believed that the franchisor was going to do everything for him.

We studied the history of cases involving this franchisor. It turned out that all of the lawsuits initiated to extract funds from the franchisor ended up being denied.

In this example, the agreement was written up in such a way that it was impossible for the user to fulfill its obligations. The users, believing that an agreement's obligations were a mere formality, didn't fulfill any of their obligations. Thus, the courts would take the side of the franchisor and throw out the lawsuit.

There are, of course, conscientious companies on the franchises market to whom promoting their brand is important. In the cases, franchisor companies truly help iron out the business processes, train personnel, and provide consultations on finding and processing facilities.

If you've decided to invest your money in a franchise, we strongly recommend consulting lawyers to have them write up or analyze your commercial concession agreement as well as do some research on the franchisor.

Word & Law is prepared to provide assistance and legal support in concluding any type of commercial concession agreement.