The Franchise Law Review: Brazil
i Brief overview of the current Brazilian franchising market
Franchising has been one of the most important business models in Brazil since the 1980s, when important international brands such as McDonald's, Dunkin' Donuts and the holders of other renowned trademarks reached out to the Brazilian market and introduced a new form of opportunity: business-format franchising.
From the legal viewpoint, franchising is understood as a system by which a franchisor grants to a franchisee the right to use a trademark and other intellectual property rights associated with the right to produce or distribute products and to use technology and know-how regarding business implementation and administration or operational systems either developed by or granted to the franchisor, for direct or indirect remuneration.
Based on the grant of trademark rights to the franchisee and provision of a unique architectural, business and organisational format for commercial establishments to the franchisee, the franchising format provides Brazilian entrepreneurs with the initial security they seek for investments. The particular characteristic of being a system that is already established and tested in the market, and considered a 'successful business recipe', provides a more secure investment route and entails relatively less capital for starting a business.
Moreover, business-format franchising allows franchisors to expand their business rapidly throughout the Brazilian market, which has continental dimensions, and at the same time enables them to maintain the control necessary for the quality of products and services.
Consequently, franchise business has risen at impressive rates. The sixth franchising survey carried out by the Brazilian Franchising Association (ABF) in September 1995 revealed that the annual revenue from franchises in 1995 was US$68.3 billion, which represented approximately 10 per cent of Brazil's gross national product, and a publication recently issued by ABF states that in 2019 franchises represented 2.6 per cent of Brazil's gross domestic product.
The overall result for franchising in 2019 was positive, as the sector grew at a rate of 6.8 per cent with an overall revenue of 186,755 billion reais. In 2017, the franchising sector produced revenues of 163.3 billion reais and in 2018 it generated 174.8 billion reais.2 The number of workers in direct employment in franchise businesses increased 4.6 per cent, with 1,358,139 workers, following the increase in the number of new franchise units by 9.2 per cent, driven by the growth in the following segments:3
- food services, exploiting the diversity of Brazilian cuisine;
- housing and construction, increasing the range of products and services with greater integration between industry and stores and also greater investment in training;
- fashion, with growth in clothing and shoes through the review of product lines and positioning of brands; and
- communications, information technology and electronics, because of the increase in the assortment of payment management companies and also the opening of new units.
Despite the positive results attained by the franchise model in the market, this success was not accomplished without facing the challenges presented by the economic and financial crisis, which demanded changes and led to more flexible franchise formats, such as the expansion of online sales, requiring many brands to reinvent themselves and use technology to their advantage.
These facts make the Brazilian franchising market one of the largest and most sophisticated and, in terms of the number of franchising chains in operation, the country is ranked fourth in the world, coming only behind the giants of China, the United States and South Korea.
In addition to the potential inherent in the Brazilian consumer profile, Brazil has a diverse market full of great opportunities, attracting a number of foreign franchise chains. Currently in the Brazilian market, there are 214 foreign franchisors from 30 different nations, including the United States, France, Portugal, Spain and the United Kingdom. Among the foreign companies are McDonald's, The Body Shop, KFC (short for Kentucky Fried Chicken), Swarovski, 5àSec, Pizza Hut, Maybelline New York, Domino's Pizza, Subway, Kumon and others.
ii National franchise association
The continuous positive outcomes achieved by the franchise sector in Brazil would not be possible without the consistent performance of the ABF4 (a non-profit organisation that has been operating in Brazil for over 30 years) and its well over one thousand associated members, assisting and supporting the development of the activities of the franchise market in Brazil. The ABF encourages improvement of the overall performance of its members, through a permanent exchange of technical information, data and ideas, as well as through the preparation and dissemination of research, courses, lectures, seminars and events. In addition, it sets standards for the practice of franchising in Brazil, to boost even further the credibility of the franchise sector and guarantee the seriousness of the system around a common ideal: strong, prosperous and ethical franchising.
In support of the sector, the ABF has signed multiple agreements with national banks, creating new possibilities for the safe and accelerated development of franchises in Brazil, through incentives and management support programmes in the most diverse areas for both franchisees and franchisors, in addition to having agreements with projects that stimulate the growth of Brazilian franchising exports, such as Apex-Brasil.
On the international scene, ABF stands out as a founding member of the World Franchise Council (an entity that brings together the most important franchise associations in the world), as well as being a member of the Ibero-American Federation of Franchises. The ABF is also a member of the International Franchise Association, a corresponding member of the European Franchise Federation and occupies a seat at the Federation of International Retail Associations.
i Restrictions and requirements
Foreign franchisors do not face any specific restrictions on entry to and exploitation of the Brazilian market, except for the limitations imposed on the acquisition of rural real estate and foreign capital participation in certain business areas, including in relating to nuclear energy, postal and telegraph services, and radio and television businesses.
There are basically five types of compliance requirements that a foreign franchisor must fulfil to exploit the local market through franchising, as follows:
- First, the foreign franchisor must have filed a trademark application or registration at the Brazilian Trademark Office (BTO) and identified the relevant intellectual property rights that will be granted and used by a local franchisee.
- Second, a legal representative or attorney with full powers must be retained to represent the foreign franchisor in Brazil when the parties elect to employ a local dispute resolution method.
- Third, a franchise disclosure document (FDD) must be delivered to prospective franchisees or candidates 10 days before the execution of a franchise agreement or before the franchisor receives any remuneration from the candidate.
- Fourth, a written franchise agreement must be adopted to regulate the franchising relationship with the local franchisee. According to Brazilian franchise law, international franchise agreements or those that involve a foreign party need to be originated in the Portuguese language or have an official translation.
- Fifth and lastly, there is a compulsory requirement for the franchise agreement to be registered at the BTO to be effective under Brazilian law, including to allow the possibility of bringing proceedings in the local courts to enforce related contractual rights, to allow the franchisor to secure royalty and remuneration remittances overseas, and the franchisee to qualify franchise royalties and fees as tax-deductible operational expenses.
Further to these requirements, foreign franchisors should comply strictly with the public order laws applicable to business transactions. Also of particular relevance are consumer laws, antitrust laws and foreign exchange laws, which affect directly the validity and enforceability of franchise agreements in Brazil.
ii Foreign exchange and taxation
There exist extensive foreign currency exchange controls in Brazil, subject to specific regulations and monitored by the Brazilian Central Bank (BACEN) with the objective of preserving foreign reserves and ensuring the country's ability to comply with international financial obligations.
According to the Foreign Capital Law5 , Law 4,390 of 29 August 1964 and Law 4,506 of 30 November 1964, BACEN is entitled to establish the exchange-control policy, including in respect of the sale and purchase of gold and of any transactions involving foreign currency. In this regard, BACEN implements policy by regulating exchange transactions and has the right to restrict exchange transactions when there is a serious risk to foreign reserves.
Under the foreign exchange laws, remuneration remittances overseas are permitted insofar as they correspond to existing remittance item categories. There are also exceptions and exclusions from these controls.
Exchange controls are exercised on all foreign-currency transactions, including transfers of capital and dividends, royalties, import and export payments and compensation for services. Remittance of royalties from franchising arrangements is permissible under the exchange control regulations. However, such remittances are only authorised after registration of the corresponding agreement with the BTO and BACEN.
As to taxation on remittances, the laws of the land set the requirement to pay income tax on royalties and the Contribution for Intervention in the Economic Domain (CIDE), which is levied on the amounts remitted under franchise and technology transfer agreements, at rates of 15 per cent and 10 per cent respectively.
Furthermore, it should be highlighted that local franchisees may frame the remittances to foreign franchisors as operational expenses and therefore they may be tax-deductible pursuant to Ministerial Ordinance No. 436 of 30 December 1958.
i Trademark availability search
Undertaking trademark availability searches is a common practice in Brazil to obtain trademark protection and takes place through the BTO database.
In view of the prevailing first-to-file principle in Brazil, the trademark search is relevant as it enables the prospective applicant to identify existing trademarks already granted or simply filed at the BTO and, as the case may be, to develop strategies to overcome existing obstacles to registration.
The first step is to identify in which of the 45 classes the trademark application can be filed at the BTO. As of 3 January 2000, Brazil, as a signatory country to the Nice Agreement, has adopted the International Classification of Goods and Services identified by a trademark.
The identification of the classes in which the products and services that will be covered by the trademark are allocated will help the applicant to conduct the search at the BTO. One of the search goals is to verify whether the desired mark is free for registration, meaning that it is not a reproduction or imitation of a third-party trademark registration that distinguishes a product or service that is identical, similar or akin and would therefore be likely to cause confusion or association among consumers.
The availability search also takes into account other registrability aspects in light of the Brazilian Intellectual Property Law (the IP Law),6 such as the distinctiveness of the character and its associations, moral and ethical principles, signs composed of geographic indications, civil or well-known names, official seals and so on.
ii Trademark protection
Ownership of the property of a mark is acquired by means of a validly granted registration, securing for the owner exclusive use rights associated with the mark throughout the national territory.
As previously mentioned, the IP Law generally adopts the first-to-file system, which means that trademark protection is guaranteed to the applicant that first files the application with the BTO. Nevertheless, as an exception to the first-to-file system and territorial principle, the IP Law recognises the rights of well-known marks under Article 6 bis of the Paris Convention.
It is also important to point out that, as Brazil is signatory to the Paris Convention, foreign applicants may claim priority rights and preference over a registration within six months of the date of the first foreign filing.
The trademark will be allowed for registration by the BTO if it does not infringe 23 items of Article 1247 of the IP Law. In sum, the trademark in analysis must be sufficiently distinctive, established in good faith, lawful and must not conflict with prior registrations. If the application goes smoothly, the registrability examination does not take longer than 12–18 months.
The trade dress of a service or business may be protected by a composite or figurative mark, but if it is not adequate for the BTO registration requirement, it may be protected by the unfair competition rules set out by the Civil Code8 in Articles 186–1889 and Article 884,10 and those rules in the IP Law specific to unfair competition.11
Trademark registration in Brazil is valid for a continuous period of 10 years counted from the granting date and may be renewed for equal and successive periods. After the granting of trademark registration, its validity may be challenged through an administrative nullity action within 180 days or in court within five years. The extended statute of limitations is provided for court proceedings seeking cancellation and the nullity of registrations obtained in bad faith and in cases of the registration of a third party's well-known trademark by an unauthorised person.
Last but not least, in 2019, Brazil finally adopted the Madrid Protocol, which is the primary international system for facilitating the registration of trademarks in up to 123 jurisdictions worldwide.12 According to the BTO resolution regulating international applications designating Brazil, a local agent must be appointed only if there is a need to submit a motion or a petition to the BTO. However, Article 217 of the IP Law states that a person domiciled abroad must permanently maintain a local attorney in the country, with powers to represent it administratively and judicially, including powers to receive summonses. In addition, oppositions, nullities and other measures filed against an international application or registration will be published in the Official Gazette and the BTO will not notify the WIPO. In this respect, it is strongly recommended that a representative be appointed when the Brazilian designation is filed.
According to Article 130 of the IP Law, the registrant of or applicant for a mark is also guaranteed the right to (1) assign the registration or application for registration; (2) license its use; and (3) care for its material integrity or reputation. This means that the rights acquired by the trademark application or registration entitle the owner to pursue an infringement lawsuit against any user of the same or confusingly similar trademarks. Legal remedies available to franchisees, franchisors and trade secret holders include:
- Criminal search and seizure orders, which gather all confidential material in possession of an unauthorised person. The judge may grant an ex parte order to prevent imminent risks that would jeopardise realisation of the appropriate remedy. When intellectual property rights are involved, it is recommended to insert a specific clause in the franchise agreement giving the franchisor the right to proceed with the search and seizure of confidential materials, trademarks, posters and any materials related to the operation of the franchise. The destruction of the materials may be ordered by the trial judge; however, this is only granted after the final decision in the main civil suit proceedings, which must be instituted within 30 days of the grant of the search and seizure order.
- Temporary restraining orders, which are also available to franchisors and follow the same conditions as the preliminary search and seizure orders.
- Civil suit, which is the appropriate action for the franchisor to assert its intellectual property rights and seek indemnification for losses, and damages in respect of infringement. It should be pointed out, however, that Brazilian court decisions are very conservative with regard to indemnification and usually award damages only to the extent of the actual amounts involved, proved by an inspection of the infringer's accounts. In view of that, it is recommended that a specific clause be included stipulating a fixed amount of indemnification for trade secrets.
- Criminal suit, which may be pursued if the infringing party acted with intent and has committed a crime such as unfair competition.
It should be highlighted that there are courts specialised in intellectual property and business transactions and law matters in the cities of Rio de Janeiro and São Paulo, and expansion of these courts to other states of the Brazilian federation is imminent. The federal courts located in the city of Rio de Janeiro address matters linked to the annulment of decisions issued by the BTO, such as annulments of trademark and industrial design registrations. The state courts deal with intellectual property infringement disputes and therefore are an adequate venue for injunctive reliefs, for recovering losses and obtaining damages in compensation for losses caused by acts of violation of industrial property rights and unfair competition.
i Legislation, pre-contractual disclosure and mandatory clauses
A new regulatory framework for franchises in Brazil was approved by Congress and sanctioned by the President of the Republic, resulting with the publication of Law 13,966 of 26 December 2019 (the New Franchise Law), which revoked the old Franchise Law, Law 8,955 of 1994, which regulated this area previously. The New Franchise Law has been valid and effective since 25 March 2020.
The New Franchise Law reinforced the requirement for delivery of an FDD to a franchisee candidate at least 10 days before the execution of the franchise agreement or pre-agreement or receipt of any amounts related to franchise business. The FDD encompasses the economic, operational and legal information of a franchise chain and the franchisor and is therefore regarded as indispensable to the decision to open a franchise unit. The matters that should be addressed in the FDD, and which should be provided in the Portuguese language, are as follows:
- background information and records of the franchise business;
- detailed information about the franchisor and its affiliated companies in Brazil, including their taxpayer number;
- balance sheets and financial statements of the franchising enterprise for the past two fiscal years;
- an indication of all litigation related to the franchise chain challenging the franchising system or jeopardising the operation of the franchise in Brazil, in which the franchisor, the controlling enterprises and title holders of trademarks and other intellectual property rights and their sub-franchisors have taken part;
- a detailed franchise description and a general description of the business and the activities that will be performed by the franchisee;
- a profile of the 'ideal franchisee' in terms of previous experience, education level and other characteristics;
- requirements concerning the direct involvement of the franchisee in the operation and administration of the business;
- the total estimated investment covering initial investment, acquisition of equipment, initial stock, initial fees, general administrative fees and payment terms;
- information on royalties and other remuneration that will need to be paid by the franchisee to the franchisor or to any indicated third parties, detailing the nature of the payment, such as rental or marketing fees and minimum insurance;
- a complete list of franchisees, sub-franchisees and sub-franchisors of the franchise network and those who have left the franchise in the past 24 months, with their names, addresses and telephone contact details;
- information related to the scope of the territory, including whether the franchisee is guaranteed exclusivity or preference over a given territory of operation and, in this case, under what conditions and if there is an option for the franchisee to make sales or provide services outside the territory or to carry out exports, and an indication of other competition rules concerning the territory;
- information about the franchisee's obligation to purchase any goods, services or raw materials for the deployment, operation or management of the franchise from franchisor-approved suppliers (including a complete list of these suppliers);
- an indication of what is effectively offered to the franchisee by the franchisor concerning manuals, supervision, training and assistance on selecting the location and an indication of the architectural layout of the franchise unit;
- specification of the status of the trademarks and other intellectual property rights that will be used in connection with the franchising grant, including information on the registration of plant varieties at the National Plant Variety Protection Service;
- a statement of the franchisee's position upon expiry of the franchise agreement regarding know-how or industrial secrets that the franchisee had access to, and regarding the possibility of the franchisee competing with the franchisor;
- delivery of a model of the standard franchise agreement, including detailed financial information regarding situations where fines, compensation and indemnifications are to be applied;
- assignment and succession rules;
- the contractual period and renewal rules;
- information on existing rules on limiting competition between the franchisor and the franchisees and between franchisees, during and after the contractual term; and
- an indication whether the franchisor can profit from subleasing the premises to the franchisee.
Furthermore, the New Franchise Law imposes the penalty of nullification of the agreement and the refund of any amounts paid and losses incurred, as well as payment of damages, for non-compliance with the FDD requirements in the event that the franchisor omits any of the required information or provides false information in the FDD.
There are two different statutes of limitations applicable in cases of non-compliance with delivery of the FDD should a franchisee wish to proceed in court against a violation of the New Franchise Law of this kind. First, the request in court for the annulment of the franchise agreement may take place within two years of the date of execution of the franchise agreement, pursuant to Article 179 of the Civil Code. Second, franchisees may claim for losses and seek damages within 10 years of the date of execution of the franchise agreement in respect of its non-compliance with the law, as provided by Article 205 of the Civil Code.
Among the developments of the New Franchise Law, we highlight the recognition of the business nature of the franchisor–franchisee relationship and the consequent removal of the applicability of consumer and labour laws in the relationship. With this determination, the case law understanding is confirmed and affirms the absence of a labour relationship between franchisor and franchisee and between the franchisor and the franchisee's employees. Also, arbitration has been explicitly stipulated as an adequate arena of contractual resolution thereby dissipating any court inquiries on acceptance of arbitration.
Another development with a strong positive impact on franchising is the option for the franchisor, as sub-tenant, to propose the renewal of the commercial site where the franchisee runs its business or holds a franchise unit. This rule alters Paragraph 1 of Article 51 of Law No. 8,245 of 18 October 1991 and ensures the franchisor's right to maintain the commercial site for the franchise network even if the franchisee has no interest in the premises. To secure the franchisor's right, a specific stipulation is required in the FDD. Also in relation to sub-tenant agreements, the New Franchise Law permits the lease to be paid by the franchisee to the franchisor to be greater than the amount that the franchisor pays to the premises owner. This determination eliminates an anomaly in the rental law and also recognises the sublet as an element of the business's goodwill when it is accompanied by improvements.
Although the New Franchise Law does not establish mandatory clauses or template agreements that either the franchisor or the franchisee should comply with, it does establish the obligation for the franchise agreement to be officially translated into Portuguese, by means of a sworn translation, for it to be valid and effective between the parties. This imposes a burden on the contracting parties and modifies the common practice in Brazil whereby the franchisee's knowledge of the applicable foreign language of the agreement was taken to be sufficient to evidence the agreement's validity between the parties.
In addition to the New Franchise Law, franchises are also regulated by the BTO's rules, pursuant to which the conclusion of franchise agreements are recorded. A record of the agreement is indispensable for the purposes of remitting payments overseas, fiscal deductibility of such remittances and producing effects against third parties, thereby ensuring the franchisee's exclusive rights in Brazil and enabling the franchisee's rights against third parties. Examination of the agreement by the BTO implies the prima facie assessment of its legality and enforceability.
Registration is not indispensable for the validity of the agreement between the parties and for the maintenance of the validity of the franchised industrial property rights in Brazil.
The requirements for registration are: (1) the franchisor must demonstrate that it is engaged in similar activities in the country of origin or at least prepared to initiate franchising in Brazil; and (2) the franchisor's trademarks must be duly registered or at least filed in Brazil for the registration of the agreement. Registration procedures and formalities are extensive and governed in detail by BTO Resolution 199 of 7 July 2017.
Further to registration at the BTO, an international franchise agreement needs also to be registered at BACEN so that remittances may comply with foreign exchange control laws.
i Franchisor and franchisee tax liabilities
According to the Brazilian Constitution of 1988, the power to establish and collect revenues is shared by the federal, state and municipal authorities. However, they allocate different kinds of taxes respectively. The federal authorities may collect tax on imports and exports, income and earnings, manufactured products, financial transactions, rural real estate property, fortunes, foreign exchange and insurance, and transactions with loans and securities. Authorities from the states and federal district may tax on transmission of property causa mortis or donations, any operations related to the circulation of goods and rendering of services from interstate and inter-municipal transportation and communication, operations and services that are initiated abroad, ownership of motor vehicles and 5 per cent of any tax paid to the federal authorities as income tax. Lastly, municipalities may collect taxes in relation to, among other things, urban buildings and lands, retail sales of liquid and fuel, or services of any nature not taxed by the federal authorities.
Different tax liabilities may therefore be applicable to local franchisors and franchisees depending on the activities concerned and also on the nature of the franchise (e.g., business-format franchising, unit franchise, store-in-store franchising). We highlight therefore the main taxes paid by franchise business, as follows:
- income tax, which is payable by any residents, companies, associations and corporations domiciled in Brazil;
- urban building and land tax, which is levied at a rate instituted under municipal law and assessed on the value of the property;
- tax on financial transactions and operations (IOF), which banks and financial institutions are responsible for collecting on certain types of financial operation, such as credit, exchange and insurance, and securities transactions;
- sales value added tax, which is payable on an added value basis on all physical movement of merchandise; and
- service tax (ISS), which is payable on gross billings for certain listed services and varies from city to city and according to the type of service rendered.
ii Tax-efficient franchising
Fiscal efficiency is considered as an aspect of whichever tax regime the franchise will operate under – meaning basically how the franchise will choose to pay taxes and fees to the Brazilian government.
In Brazil, there are three main tax regimes, as follows.
National simplified regime
The national simplified regime includes an option for individual micro-entrepreneurs. The individual micro-entrepreneur (MEI), as the name implies, is an entrepreneur who works without a partner (with, at most, one employee) and has revenues of up to 81 thousand reais per year (following the rise introduced by Complementary Law 155/2016).
The MEI is exempt from federal taxes and pays a single simplified monthly fee, varying according to the activities performed.
For micro and small companies with an annual revenue of up to 4.8 million reais (following the rise introduced by Complementary Law 155/2016), the national simplified regime replaces the payment of several taxes with one single-rate tax, the level of which depends on the company's turnover – the higher the turnover, the higher the level of the tax (up to 16.85 per cent of revenue).
Presumed profits regime
The presumed profits tax regime includes companies with revenues of up to 48 million reais per year. Under this method, income tax (IRPJ) and the Social Contribution on Profits (CSSL) are not calculated on the basis of the company's calculated profit, but rather based on a presumed profit, calculated from the application of predefined levels of corporate revenue (in general, 8 per cent for industry and commerce and 32 per cent for services).
Actual profits regime
Any company can operate under the actual profits regime; however, the calculation of taxes and fees in this modality is more complex. Nonetheless, for corporations with annual sales exceeding 48 million reais, it is mandatory to be taxed under the actual profits regime.
In this regime, IRPJ and the CSSL are calculated from the company's actual profits, with adjustments (positive and negative), while the Social Integration Programme (PIS) contribution and the Contribution for the Financing of Social Security (COFINS) are levied on an organisation's turnover, with a higher rate than that of the presumed profits regime, but with an option for discounts using credits on acquisitions.
Companies opting for the actual profits regime also need to decide on a quarterly or annual calculation. In the case of the annual option, it is still possible to choose between an estimation regime and the drawing up of monthly balance sheets. In any case, under this tax regime, the company is required to submit accounting and financial records regularly to the Brazilian Federal Revenue.
iii Tax on remittances
Remittance overseas of royalties and remunerations derived from a franchise agreement are subject to the following taxes: (1) IOF, which is levied at the rate of 0.38 per cent on any remittance or on transactions or transfers of moneys overseas; (2) withholding tax, which on the remuneration derived from a franchise agreement will be levied at the applicable rate of 15 per cent; and (3) CIDE (see also Section II.ii),13 the set rate for which is 10 per cent, applicable to any and all amounts paid, credited, delivered or remitted from franchising.
If the remuneration remittances come specifically from the rendering of services, the following additional taxes will be levied: (1) ISS, which is a municipal tax that can reach up to 5 per cent of the price of the service, depending on the service rendered; and (2) PIS and COFINS (see above), which are contributions charged on services rendered by foreign parties in the Brazilian market at the rates of 1.65 per cent and 7.6 per cent respectively.
Impact of general law
i Good faith
Under the Brazilian legal system all contracts are subject to the principles of good faith, which means that the parties should proceed with fairness and mutual trust when establishing the contractual provisions. The principle is a legal rule provided in Articles 113 and 442 of the Civil Code. It is considered an implied covenant of commercial agreements, and it is viewed as being the contracting parties' duty to cooperate with each other to achieve specific interests that they would not obtain if standing alone. Therefore there is a general duty of collaboration and an expectation of loyalty between the parties in the negotiation, execution and termination of the agreement. In addition, according to this principle, the language of a contract may not prevail over the disclosed intention of the parties. As a result, the parties are limited to imposing certain essential terms in a contract, thereby ensuring the terms are not of an abusive nature or otherwise unbalance the contractual relationship unreasonably.
ii Employment law
Considering the autonomy and independence enjoyed by the contracting parties in a franchise agreement, there is essentially no employment relationship between them. Despite the evolution of franchising, some judges have been of the understanding that the franchisor and its franchisees form an economic group, hence the franchisor has a responsibility regarding the labour and social security fund contributions of the franchisee's employees.
This issue has finally been resolved by the final part of Article 1 of the New Franchise Law, which confirms the absence of an employment relationship between the franchisor and the franchisee and the franchisee's employees in the franchise contract. The intent of the New Franchise Law is for the marked division between the two companies to be viewed as unequivocal, with a sharp dividing line between the obligations assumed by the franchisee against third parties and the obligations contracted into by the franchisor, which are quite distinct.
iii Consumer law
Pursuant to the legal provisions of the Brazilian Consumer Code,14 it is understood that it is not correct to affirm a consumption relationship between franchisor and franchisee. The franchisee does not purchase goods or services from the franchisor for its own benefit, but rather the goods and services contracted are indispensable for the development of the franchisee's business.
The New Franchise Law has also eliminated this controversy, stating in Article 1 that there is no consumer relationship between franchisor and franchisee given that the existing relationship is not one of consumption but of economic development. Thus, the franchisee trades with third parties – final recipients of the product or service – as if it were an intermediary or reseller of the franchising company.
iv Agency distribution model
Agency distribution models employ different concepts from franchising transactions in the sense that franchising essentially requires the right to produce and distribute products associated with trademarks and other intellectual property rights and the use of particular operational methods, whereas the agency model is understood as commercial representation and involves the right to promote and intermediate certain business in specific territorial zones for compensation.
In franchise arrangements, there is no intermediation of business as franchisees in fact provide, offer and sell the goods and services identified by the franchisor's marks.
Another difference is that agency models are specifically defined by Article 710 of the Civil Code (and by the Commercial Representation Law15) and franchises by the New Franchise Law.
v Competition law and restrictive covenants
The antitrust laws are regarded as public order laws, making compliance mandatory for all franchisors and franchisees. Law 12,529/2011 regulates competition in Brazil and establishes requirements to tackle abuses of predominant economic positions. Among the anticompetitive practices listed in the provisions of Law 12,529/2011 that may constitute a violation of the economic order and therefore may influence the operation of franchise agreements are: (1) the establishment of common prices (price-fixing) and sales conditions; (2) influence on the adoption of uniform commercial behaviour; (3) limitations or restraints on trade or market access by new companies; (4) obstacles to the establishment, operation and development of competing enterprises, suppliers, purchase or financing of certain products or services, and (5) the tying of sales of a product to the acquisition of another or to the utilisation of a service.
As a result, tie-in provisions or those that fix the price of products commercialised by franchisees, establish exclusive supply arrangements or make compulsory the acquisition of certain products because of specific standards of quality may have their validity questioned if the franchisor stipulates stringent restrictions without certain limitations, such as time and geographic area, or if the contract is likely to limit competition. Nevertheless, it is important to point out that contractual clauses are regarded as anticompetitive only where they are likely to limit justifiable competition or concentrate economic power so as to dominate markets or practise abusive pricing.
In the case of franchises, competition covenants restrictions should be accepted when they are established proportionately to organise and standardise the franchisee's commercial practice insofar as this requires imposing a strictly uniform marketing strategy on the chain. Furthermore, it is acknowledged that covenants limiting competition have to be limited to a set period and only in a specific territory. Therefore, indeterminate provisions are not legally valid in this regard. The franchisor may also limit franchisee ownership interests in competitive companies and is likely to justify restrictions of this kind as necessary for the maintenance of the franchised network's quality standards, the quality of the commercialised products and the protection of trademark goodwill and, more importantly, trade secrets.
Although the Franchise Law does not impose any limitations on the termination of a franchise agreement and its effects, the parties should always be aware of the general principles and rules of the Civil Code, as well as those of contract laws. The parties may rescind the agreement unilaterally and without prior notice in cases of breach and in the specific situations set out in the agreement.
Nevertheless, throughout the term of the agreement, any party may question the validity of any provision based on its abusive practice, illegality and on the general legal principle of opposition, or even the manner in which the provision is implemented.
The parties may also stipulate post-termination provisions such as those related to the takeover of the franchisee's or master franchisee's business by the franchisor, the franchisor's right to purchase the real estate where the franchisee's business is located, confidentiality obligations and the option to buy the franchisee's business. Such post-termination provisions are enforceable in Brazil, including those related to confidentiality clauses.
vii Anti-corruption and anti-terrorism
The Brazilian Anti-corruption Law16 provides for administrative and civil liability of legal entities for conduct that is damaging to or against the interests of local and foreign public administrations.
This law defines the concept of corruption and sets out both cases of conduct against the interests of the public administration that are deemed illegal and the penalties for such conduct, including fines ranging from 0.1 per cent to 20 per cent of the gross revenue of the legal entity responsible.
Although it is understood that liability for conduct against the interests of a public administration should rest with the legal entity directly responsible, the Anti-corruption Law opens up the possibility of using the principle of 'disregarding the legal entity' to extend the penalties to other companies and persons. This principle may be exercised where there is evidence of dissimulation by another entity regarding its observance of the Law or confusion exists as to who was directly responsible for the violation, among other elements that may obfuscate the identity of the breaching party. It is not clear whether this principle could be applied to a franchisor in the event that one of the franchisor's franchisees engages in corrupt practices that ultimately benefit the franchisor and the franchise network. Franchise agreements should therefore contain anti-corruption clauses stating that the franchisee is to be held solely responsible for practices committed by that franchisee in violation of the Anti-corruption Law. Furthermore, agreements should stipulate that both franchisor and franchisee should employ their best efforts to guarantee strict compliance with and enforcement of the provisions of the Anti-corruption Law; for example, by not participating in any unlawful acts, corruption or behaviour that could be considered to have as an objective an undue advantage in a relationship with a national or international public administration.
viii Governing law and arbitration
The principles governing conflicts of law in Brazil permit the parties to freely stipulate in their contract the applicable law and jurisdiction they understand to be the most convenient. Therefore, a clause stipulating a prevailing foreign law and jurisdiction and arbitration to resolve contractual disputes is valid and effective. As to the homologation of foreign court and arbitration awards, Legislative Decree 4,311, published in the Official Gazette on 24 July 2002, regulates the country's accession to the New York Convention. As a requirement of the text of the Convention itself, Brazil achieved the international status of signatory country 90 days after the filing of its ratification at the United Nations on 5 September 2002. Nevertheless, it is important to state that the enforcement of foreign awards issued by courts and arbitration are subject to prior homologation by the Superior Court of Justice, which assesses whether an award violates any laws of public order.
ix Dispute resolution, breach of contract and remedies
The enforcement of franchise contracts can be obtained through court proceedings and can be guaranteed by different kinds of civil procedures. Under the Civil Code rules, damages and compensation for losses may be sought in state courts through an ordinary procedure for breaches of any provisions of the franchise contract. As well as the actual amount of losses incurred, damages and losses may be claimed for lost profits. However, it is necessary to prove any undue profits obtained by the infringer that directly affect the the infringed party's loss of revenues.
With regard to indemnification, the Brazilian courts have been very conservative and usually award only anticipatory damages, those directly connected to the tort and what can be proved by an inspection of the parties' accounting books. As a result, liquidated damages are usually established in franchise agreements in the event of contractual breach.
The most effective civil procedure to obtain a prompt remedy to restrain the franchisee from continuing to use the franchisor's intellectual property rights and to stop conduct prohibited under the contract termination provisions is the civil injunction and search and seizure action. An ex parte injunction may be obtained but is subject to evidence that the plaintiff has a clear right and the imminent risk of losing rights over its intangible property such as through unauthorised use of trademarks and copyrights and disclosure of trade secrets upon termination of the contract. Temporary restraining orders may also be awarded subject to conditions similar to those indicated above.
The costs of judicial proceedings are usually awarded to the winning party in a nominal amount. Attorney fees are awarded partially, at a rate fixed in the decision. These amounts are due after the execution of the decision, when the indemnity is calculated.
On 14 August 2018, Law 13,709 (the General Data Protection Law (LGPD)) was enacted in Brazil, protecting private data and regulating the processing of personal data, including on digital platforms, as well as dealing with 'sensitive personal data'. It further modified Law 12,965 of 23 April 2014 (the Internet Law). The Internet Law deals specifically with business to consumer transactions and matters related to internet use or any data of a private nature transmitted through digital platforms on the internet.
Recent law developments relate to the extension of the applicability of the LGPD to franchisors, especially foreign ones, when a franchisee is the party who processes and stores private data collected from consumers. It has not yet been determined whether the LGPD requirements and obligations extend to the franchisor in view of the franchise chain relationship with franchisees or whether the franchisor would be liable for penalties for acts committed by franchisees in violation of this public order ordinance.
Furthermore, the level of monitoring and penalties to be applied by the National Authority for the Protection of Data to enforce the LGPD obligations and requirements, especially on franchisors and franchisees, are also matters that have yet to be examined.
1 José Carlos Vaz e Dias and Bruna Valois are partners at Vaz e Dias Advogados & Associados.
3 Information available in the official guide published by the Brazilian Association of Franchising, 'Official Franchise Guide', October 2020, pages 48–54. Also available at http://www.guiaoficialdefranquias.com.br.
5 Law 4,131 of 3 December 1962.
6 Law 9,279 of 14 May 1996.
7 Art. 124 of the Industrial Property Law lists unregistrable marks.
8 Law 10,406 of 10 January 2002.
9 These provisions deal with the identification, concept and limits of illicit acts committed by any person that may generate indemnification from losses and damage incurred.
10 Art. 884 of the Civil Code addresses illicit enrichment, including the unauthorised use of trade dress of products and services by third parties.
11 Art. 195 of the Industrial Property Law enlists those unfair competition practices regarded as crimes, including the use of fraudulent means by a competitor to divert, for his own or a third party's benefit, another clientele.
13 Pursuant to Law 10,168/2009 of 29 December 2000.
14 Law 8,078 of 11 September 1990.
15 Law 4,886 of 9 December 1965.
16 Law 12,846, of 1 August 2013.