The Franchise Law Review: Japan

Introduction

The Japan Franchise Association reported that during the period from 1 April 2019 to 31 March 2020 the number of franchise systems had decreased by 0.3 per cent from the previous year to 1,324 systems, and the number of outlets (including outlets owned by a franchisor and franchisee) had decreased by 0.6 per cent from the previous year to 262,869 outlets. This was the first time since 2008 there has been a decrease from the previous year. Franchise businesses generated over ¥26 trillion in sales during this period.2

The franchise model is often seen in the following industries: convenience stores, bakeries and pastries, fast food restaurants, Japanese pubs, dry cleaners, fitness clubs and private preparatory schools.

Convenience store franchise systems such as 7-Eleven, FamilyMart and Lawson are uniquely dominant in the Japanese franchising market. Sales from convenience store franchise systems accounted for approximately 43 per cent (over ¥11 trillion) of all sales generated from franchise establishments during the period from 1 April 2019 to 31 March 2020.3

In addition to the universally known American franchise systems such as McDonald's, Subway, Burger King and KFC, Japanese franchise systems also have significant presence in the franchising market in Japan. Examples of franchise systems originating in Japan are: Sukiya, Yoshinoya and Matsuya (beef bowl restaurants); MOS Burger (hamburger restaurant); and Doutor Coffee, Café de Crié and UCC Ueshima Coffee Co (coffee shops).

In recent years, responding to the growing popularity of Japanese cuisine, Japanese franchise systems have ventured overseas. These franchise systems have proactively expanded their businesses in Asian countries, including China, Vietnam, Thailand and other ASEAN countries.

The Japanese laws relevant to the franchise business include the Small and Medium-Sized Retail Business Promotion Act (SRPA), the Anti-monopoly Act and the Civil Code. In 2002, the Japan Fair Trade Commission (JFTC), which is in charge of the enforcement of the Anti-monopoly Act, issued guidelines on franchising (amending the 1983 guidelines) and further amended these in 2010 and 2011 (the Franchise Guidelines). Given the JFTC's responsibilities, the Franchise Guidelines are prepared from an anti-monopoly perspective for franchise businesses and set out the JFTC's attitudes to franchising. In addition, franchise businesses may be subject to the general ethics code, guidelines and independent standards of the Japan Franchise Association.

There are many franchisees that have left their jobs as corporate employees to start their own business. These franchisees tend to lack sufficient knowledge to conduct franchise businesses and a number of problems have emerged as a result. These problems often involve franchisors' obligation under franchise agreements to provide sufficient explanations to franchisees, franchisees' obligation to report and franchisees' anti-competition obligation, as well as franchisors' abuse of dominant position. There are many cases where these problems have developed into disputes and litigation.

Market entry

i Restrictions

In Japan, there are no restrictions on foreign investment specific to franchises. In addition, there are fundamentally no restrictions on foreign companies granting master franchise rights and similar rights to Japanese corporations.4

On the other hand, under the Foreign Exchange and Foreign Trade Act, if (1) a foreign company acquires the shares or equity of a company other than a listed company5 (including when acquiring new shares as a result of formation), or (2) a foreign company will be acquiring 1 per cent or more of the shares of a listed company,6 a prior notification will be required, depending on the business type of the investing company. An amendment to the Foreign Exchange and Foreign Trade Act in 2020 changed the standard from 10 per cent to 1 per cent of the shares of a listed company and introduced a new system for exemption from prior notification.

Moreover, under the Foreign Exchange and Foreign Trade Act, since prior notice is required for instances of investments in restricted business types, such as those that affect Japan's national security (aeroplanes, satellites, etc.), those concerning public order (telecommunications businesses, broadcasting businesses, passenger transportation businesses, etc.), those regarding public safety (security services, etc.), and investments from countries considered to require examination with regard to the principle of reciprocity, a franchise business is not likely to require a prior notice. Note that the 2020 amendment expanded the scope of businesses subject to prior notification under the Foreign Exchange and Foreign Trade Act to include such businesses as information and communication services.

Furthermore, if foreign companies acquire real property in Japan from residents, the foreign companies need to report this to the Minister of Finance through the Bank of Japan within 20 days of the acquisition.

While some of the recent amendments have been mentioned above, it is important to note that there have recently been many important amendments to the Foreign Exchange and Foreign Trade Act.

ii Foreign exchange and tax

There is no obligation to seek approval nor a reporting obligation imposed on local franchisees regarding the payment to foreign franchisors as long as the amount of the payment is not more than ¥30 million. Tax issues are discussed in Section V.

Intellectual property

i Overview

In franchising, a well-known brand is the most valuable asset of the business. It is, therefore, essential to protect and reinforce brand trademarks when expanding the franchise business.

If a franchisor fails to apply for and register its trademarks and if a third party who conducts a similar business using commercial indications that are similar to the franchisor's trademarks emerges, the franchisor will need to claim its rights under the Unfair Competition Prevention Act (UCPA). Under the UCPA, a plaintiff must prove that an indication is well known or famous among consumers and proving this could be time-consuming. Furthermore, if the third party has already registered a trademark similar to the franchise system brand or trademarks and has already been using the trademark in products or services similar to those of the franchisor, there is a possibility that the third party may seek an injunction preventing the franchisor from using the franchisor's own brand and trademarks.

In fact, in the decision rendered on 10 September 2012 (see the website of the courts in Japan for the INAIL case), the Tokyo District Court granted an injunction suspending the use of signage and other materials and ordered the destruction of the signage and other materials, among other orders, based on the third party's infringement of the registered trademark of the plaintiff, against the defendant who operated a franchising business using a similar mark.

Based on the foregoing, a franchisor should apply for and register its brand or trademarks after deliberating whether it is possible to register the brand or trademarks. Most franchisors follow these practices.

ii Brand search

A 'trademark right' means an exclusive right to use a trademark, registration of which has been accepted by the Japan Patent Office following an examination by the Japan Patent Office (registered trademark), for certain products or services (designated products or services)7 that arise as a result of the registration of establishment of such a right.8 A trademark holder has the exclusive right to use the registered trademark for the designated products or services without any interference by others (exclusive right to use) and, in cases where others use the registered trademark or a similar trademark for identical or similar designated products or services, a trademark holder also has the right to suspend such use and claim damages (prohibition right).9

The common method of determining whether a trademark has been registered is to use a database such as that available from the Japan Platform for Patent Information (formerly the Industrial Property Digital Library). However, because there is a time lag between actual registration and the updating of the database, a prospective applicant often obtains a copy of the trademark registry for important trademarks. A copy of the trademark registry may be applied for and obtained at the Japan Patent Office by submitting an issuance request in a designated form and paying a fee of ¥800 per case in ordinary cases. If, in relation to the trademark that a franchisor uses in its franchise business, the franchisor desires to register a new trademark or considers the registered scope to be insufficient, the franchisor should investigate whether there are any trademarks of other companies that have already been registered and consult with experts (such as patent attorneys and attorneys) about the possibility of infringement based on the result of the investigation.

Franchisors often use domain names when carrying out a franchise business. Japan Registry Services manages the database of Japanese domain names comprehensively and multiple registrars accept applications for the registration of individual domain names.

iii Brand protection

A person who desires to register any trademark must submit to the Commissioner of the Japan Patent Office an application for registration that provides the applicant's address, name (or name of its representative if the applicant is an entity), date of submission, designated products or designated services and categories of the designated products or designated services, together with documents indicating the trademark and necessary written explanations thereof.

In Japan, if there has been any application for registration of a trademark that is identical or similar to another trademark, the person who first applied for registration is entitled to the trademark, not a person who has simply started using the trademark first. For details of the procedures for registering trademarks, please refer to the website of the Japan Patent Office (http://www.jpo.go.jp/tetuzuki_e/t_gaiyo_e/tr_right.htm).

iv Enforcement

Infringement of a trademark refers to an incident where a person without authorisation uses a trademark identical or similar to any registered trademark for designated products or designated services (the designated products or services). The use of an identical or similar trademark for identical or similar designated products or services will constitute an infringement of a trademark (whereas use of an identical or similar trademark for dissimilar designated products or services or use of a dissimilar trademark for identical or similar designated products or services will not constitute an infringement). In summary:

 Identical trademarkSimilar trademarkDissimilar trademark
Identical designated products or servicesInfringementInfringement
Similar designated products or servicesInfringementInfringement
Dissimilar designated products or services

In the Kozo Sushi case,10 in which a third party filed an action against a franchisor, the court rendered a decision on the standards for determining similarity between trademarks, which relates to the issue of identity or similarity of trademarks in cases of infringement. With respect to similarity between the Plaintiff's 'Kozo' (in Japanese) trademark and the Defendant's 'Kozo Sushi' (in Japanese) and 'KOZO SUSHI' trademarks, the Supreme Court opined that similarity between trademarks must be observed comprehensively in consideration of impression, recollection and association that business partners and consumers may have with respect to a trademark based on its appearance, concept and designation and that actual circumstances of transactions of the products concerned must be investigated and similarity between trademarks must be determined based on specific transactions. The court further opined that similarity in appearance, concept or designation of trademarks may provide certain standards by which to determine whether products using a particular trademark cause misunderstanding or confusion as to the origin of the products; however, trademarks may be said to be dissimilar if, despite similarity in their appearance, concept or designation, there are other aspects of the trademarks that are significantly different or there is no misunderstanding or confusion as to the origin of the products based on the specific circumstances of the transactions. In actual practice, when finding similarity of combined trademarks, as in the Kozo Sushi case, examination of similarity with other trademarks by extracting part of the combined trademarks may often become an issue.11 According to the precedents, when examining 'specific circumstances of the transactions', the Court tends to take into account not only the manner of the handling of products and other general aspects of the business environment, but also the degree of fame of trademarks, existence of other trademarks, use and manner of use of trademarks and other unique circumstances of trademarks.

v Data protection, cybercrime, social media and e-commerce

The laws and regulations relating to cybercrime, e-commerce and other internet-related activities that apply to general commercial transactions under Japanese law also apply to franchising activities in Japan. The increasing regulatory trend to protect personal data is also noteworthy.

The Act on the Protection of Personal Information (APPI) of 2003, as amended, sits at the centre of Japan's regime for the protection of personally identifiable information.

An amendment to the APPI, which was fully implemented on 30 May 2018, significantly changed the regime to eliminate ambiguity in the regulatory framework and facilitate the proper use of personal data by businesses and to strengthen the protection of privacy. It also aims to address global data transfers and harmonise Japan's data protection regime with that of other major jurisdictions.

In recent years, while social networking sites have become increasingly popular, there have been many cases where the brand reputation of restaurants and other franchise systems were damaged because of information posted by employees and customers with malicious intent.

Under the law, the personal, economic and social reputation of an entity is protected just like honour of any individual,12 therefore an entity may file an action for defamation. However, it is extremely difficult to restore a brand's reputation once it has been damaged. Therefore, it is important to prevent such an occurrence by providing seminars for the employees of franchisors and franchisees, as well as establishing internal rules and guidelines.

Franchise law

i Legislation

There are no separate laws that relate specifically and solely to franchising in Japan. The general laws of Japan apply equally to franchise-related issues. Among relevant general laws, the SRPA and the Anti-monopoly Act (Japan's competition law) particularly affect the franchisor–franchisee relationship, while the Japanese Civil Code governs basic contractual relationships. Although it is not mandatory to do so, many franchisors follow the JFTC's Franchise Guidelines.

ii Pre-contractual disclosure

There are no general requirements for pre-contractual disclosure imposed on franchisors in general. However, Section 11 of the SRPA imposes a disclosure duty on a person who presides over a 'qualifying chain-store business'. Section 4(5) of the SRPA defines a chain-store business as 'a business in which, according to standard contract terms (1) goods are sold continually, directly or by a designated third party, and (2) assistance with the operation is given continually, principally to small or medium-sized retailers'. This disclosure should be in writing. As only franchises that involve retail are subject to this provision, it will not apply to pure service franchisees.

The items required to be disclosed under the SRPA are as follows:

  1. the name, address, number of employees, and titles and names of directors, officers and statutory auditors of the franchisor;
  2. the amount of capital or equity, the names of major shareholders of the franchisor (which means a person owning more than one tenth of the number of the issued shares or of the amount of the equity in his or her own name or those of other persons);
  3. the name and type of business of the person in which the franchisor owns more than half of the votes as a shareholder or a partner in his or her own name or those of other persons;
  4. balance sheet and profit and loss statement or any equivalent statement of the franchisor for the past three years;
  5. when the franchisor began its franchise business;
  6. information concerning the change of the number of franchised outlets over the past three business years;
  7. the number of lawsuits that the franchisor filed against the franchisee or ex-franchisee, or the number of lawsuits that the franchisee or ex-franchisee filed against the franchisor, with regard to the contract over the past five business years;
  8. the business hours, business days and regular or irregular holidays of the franchised outlet;
  9. whether and to what extent the franchisor reserves the right to operate on its own, or have another person operate, a retail business outlet that is the same as or similar to that conducted in the franchised outlet in the area close to the franchised outlet;
  10. whether and to what extent the franchisee is prohibited from joining other franchise businesses, restricted in relation to the engagement in similar businesses or subject to other types of prohibitions or restrictions with respect to the business activities during the term or after the resolution or termination of the contract;
  11. whether and to what extent the franchisee is prohibited from, or restricted in relation to, the disclosure of information that the franchisee learns of concerning the franchised business during the term or after the resolution or termination of the contract;
  12. information concerning the fee to be paid periodically by the franchisee, if any;
  13. the frequency and manner of the remittance of all or part of the proceeds, if periodically required of the franchisee;
  14. the interest rate or other conditions of financing, if any financing is offered or arranged for the sale of the franchisee;
  15. the rate or other conditions of interest, if interest is to accrue on all or part of the balance after the settlement of transactions with the franchisee for a certain period;
  16. the obligation of the franchisee, if any, concerning the structure, as well as the interior and exterior, of the outlet to be operated by the franchisee; and
  17. the amount or calculation method of the liquidated damages and the description of other obligations that shall arise in the case of a breach of the contract by the franchisor or the franchisee.

In addition, the Franchise Guidelines recommend that franchisors (not limited to retail or restaurant franchisors) disclose the following items.

  1. the conditions regarding the supply of goods to the franchisee (e.g., recommendation of the supplier);
  2. the details of the assistance to be offered to the franchisee, such as the description of the assistance to be offered, the method of assistance and the frequency and costs of assistance;
  3. the nature, amount and conditions of repayment, if any, of the fees to be paid at the time a franchise agreement is entered into;
  4. the amount and method of calculation, as well as the timing and manner of payment, of royalties;
  5. the description of any settlement arrangement between the franchisor and the franchisee, as well as the interest rate of any loan to a franchisee offered by the franchisor;
  6. whether or not the franchisor is prepared to indemnify the franchisee for any deficit or to render assistance in the operation of a franchised unit that is not doing well;
  7. the terms of the franchise agreement and the conditions of renewal, resolution and termination; and
  8. whether or not the franchisor in the franchise agreement reserves the right to operate a unit on its own or to grant another franchise close to the franchisee, and whether or not the franchisor plans to do so.

There is no general requirement for the disclosure of sales forecasts. Once a franchisor discloses sales forecasts to a candidate franchisee, however, a court may review the accuracy of the disclosure. Then, if the forecast is based on inaccurate information or the analysis process is unreasonable, a franchisor may be responsible for damage suffered by the franchisee, on the basis of the 'fair and equitable' principle set out in the Japanese Civil Code.

iii Registration

There is no registration requirement for a franchisor or franchisee in Japan.

iv Mandatory clauses

There is no mandatory clause requirement to be included in a franchise agreement. Parties are free to negotiate the terms of the deal.

Having said that, as discussed further below, some clauses imposed on franchisees, such as non-competition clauses or pre-fixed penalty clauses, may be rendered void by a court on the basis of the general 'public policy' principle set out in the Japanese Civil Code or the Anti-monopoly Act, even if the franchisee agreed to the clauses.

A non-competition clause, especially one that imposes a non-competition obligation after the termination of a franchise agreement, may be rendered void by a court. A typical situation is that a franchisor seeks injunctive relief or damage compensation against a breaching franchisee and the franchisee raises a counter-argument that the clause is void, arguing that the restriction is too excessive. A court determines whether the restriction is excessive or not, considering the scope of the business, place and term of the non-competition clause. In terms of the scope of the business, in a franchise agreement, franchisors typically prohibit franchisees from operating 'same or similar' businesses. In general, such a restriction is not likely to be considered excessive. In terms of the place of non-competition, the absence of any limitation on the scope of the place would have a high risk of being deemed an excessive restriction. The term of a non-competition clause is normally set out as two years, which is not likely to be considered excessive.

Many franchisors provide a pre-fixed penalty clause in their franchise agreement. Under such a clause, in the event that a franchisee violates each term and condition of the agreement, a franchisee must pay the fixed amount as damages to the franchisor. Franchisors prefer these clauses since it may be difficult to prove the amount of damages warranted by the breach, especially damages claimed for the violation of a non-competition or non-disclosure obligation. An excessive fixed-penalty amount may be voided by a court. In general, as long as the amount is not more than the equivalent of 30 months' royalty fees, the risk of such a pre-fixed penalty being deemed void would be low.

v Guarantees and protection

Guarantees from individuals and companies to the franchisor are generally enforceable. It is relatively common practice for local franchisors to require a director of a franchisee's business to guarantee the franchisee's obligation under the franchise agreement.

Note that the Civil Code was recently significantly amended for the first time since its establishment (about 120 years ago) and the amended Code became effective from 2 June 2020. One change introduced to the Civil Code for the protection of individual guarantors requires that at the time the contract is concluded a limit be set for the guarantee amount, indicating the maximum amount of the guarantor's responsibility.

Tax

i Franchisor tax liabilities

A franchisor may choose its business structure when operating in Japan, such as establishing a corporation (subsidiary) or a branch in Japan. Income of corporations established in Japan is subject to corporate income tax, regardless of where the income is sourced, whether in Japan or foreign countries, but where the income includes profits earned in foreign countries that are taxed in the source countries of that income, foreign taxation deductions are applied. On the other hand, for branches of foreign corporations, only income earned in Japan (domestic-sourced income) is taxable.

Japanese corporate income taxes consist of:

  1. corporate tax (national tax);
  2. local corporate tax (national tax);
  3. corporate inhabitant tax (local tax);
  4. enterprise tax (local tax); and
  5. special local corporate tax (national tax).

Transactions that include the transfer or lease of assets, or the provision of services as a business in Japan by an enterprise for consideration, are subject to consumption tax, which works like VAT. The rate of consumption tax is currently 8 per cent and is scheduled to be raised to 10 per cent in October 2019. Since the royalty fees paid by franchisees are deemed taxable for consumption tax, a franchisor must collect from franchisees and pay the consumption tax to the tax office.

ii Franchisee tax liabilities

Local franchisees are also subject to corporate income taxation.

Withholding income tax is assessed against payments of certain taxable income made in Japan. Whether certain payment is subject to withholding income tax is determined in accordance with the type of income and the classification of the recipient of that payment. As long as the recipient is a domestic corporation, payments of only interest and dividends are subject to withholding tax at source. On the other hand, if the payment is made to foreign corporations, tax should be withheld.

iii Tax-efficient structures

There is no single, optimal structure from a tax perspective. There are merits and demerits in choosing business structure options. For example, if establishing a corporation, the transfer of profits to the foreign parent company is subject to withholding tax, while withholding tax is not applicable to the transfer of profits by a Japanese branch to the main company.

Impact of general law

i Good faith and guarantees

Where equitable principles or public policy under the Civil Code are violated, the exercise of rights will be restricted, or there is a possibility that a part of a contract will be determined as invalid. The question of whether there is a violation of equitable principles or public policy in a franchise agreement may, therefore, be at issue. Since there is no explicit standard as to what constitutes a violation of equitable principles or public policy, determinations must be made while referring to the accumulation of past court precedents.

For example, with respect to penalties determined on the basis of a franchise agreement, if the penalty amount is too high, special attention is required as there may be a risk of a violation of public policy and of the agreement being deemed invalid.

While there have been court precedents recognising penalties of 60 months' worth of royalties13 and precedents recognising a penalty of three times the admission fee,14 in general, most examples are of penalties being limited to approximately 30 months' worth of royalties.15

Furthermore, in many instances where a penalty is deemed invalid, only a part of the penalty will become invalid, rather than all of it; and even from the perspective of the Anti-monopoly Act, there are issues that make it appropriate to limit penalties to approximately 30 months' worth of royalties.

ii Agency distributor model

While in practice it may seem unlikely that a franchisee would be deemed to be an agent or distributor, since the theoretical possibility cannot be eliminated it should be set out in the franchise agreement that the franchisee will not correspond to an agent or distributor.

iii Possibility that the franchisor will bear responsibility for the franchisee

In addition, as long as the franchisor and franchisee are individual entities, the principle is that the franchisor will not be liable to third parties for the acts of the franchisee. However, under the franchise system, the renown and reputation of the franchisor become important determinants for customers when choosing to purchase products. Therefore, if a third party that transacts with the franchisee incurs damage because of the acts of the franchisee, from the perspective of the third party, not only the franchisee, but also the franchisor should be thought to bear certain liability.

In particular, in many instances franchisees are individuals or companies lacking financial resources and third parties incurring damage may take into consideration the recoverability of damages and consider pursuing liability against the franchisor that does have financial resources. In this context, issues resulting from the acts of franchisees come to be disputed between franchisors and third parties and, while the numbers are low, court precedents have affirmed the basis for liability through the lending of trade name, joint tort or respondeat superior. Therefore, it would be prudent to determine from precedents any potential areas of difficulty and take corresponding preventative measures, such as substantiating the provision of manuals, for the franchisor to avoid being sued for providing defective guidance to franchisees.

iv Employment law

As there are many laws and regulations on labour in Japan, we will explain three main labour acts: (1) the Labour Standards Act, (2) the Labour Contract Act, and (3) the Labour Union Act.

Nature of 'workers' under the Labour Standards Act and the Labour Contract Act

When the Labour Standards Act is applicable, regulations on working hours and other matters will apply to a person who qualifies as an 'employee' as defined in the Act. Various laws and regulations based on the Labour Standards Act will also apply. Correspondingly, when the Labour Contract Act is applicable, an employee will be entitled to the protection of Labour Contract Act doctrines, such as the abuse of dismissal doctrine, the rescission of an offer of employment doctrine and the termination of employment doctrine, which have been found in previous court decisions to protect employees.

Under the Labour Standards Act, a worker is defined as 'one who is employed at an enterprise or office and receives wages therefrom, without regard to the kind of occupation'.16 Notwithstanding the form of the agreement, if a person corresponds substantially to the definition of a worker, that person will receive protection under the Labour Standards Act; the following factors have been raised as comprising a standard by which to determine the nature of workers.17

Core standard of determinationFactors for determining whether the labour is under direction and supervisionWhether there is freedom to accept or refuse requests to work, instructions for work to be engaged in, etc.
Whether there is direction and supervision in the execution of services
Whether there are restrictions of workplace and work times
Whether it is permitted to let another person perform the services on behalf of the person
Nature of consideration for remuneration of labourWhether the method of calculation of remuneration has the nature of consideration for labour provided (for example, payment on an hourly basis and payment of overtime pay would tend to support a determination of the nature of workers)
Factors reinforcing the determination of the nature of workersWhether the activity has the nature of an enterpriseWhether the worker himself or herself is bearing the expenses, such as for the equipment and facilities
Whether there is exclusivityWhether it is permitted to engage in other work at the same time
Awareness of the user sideWhether withholding is made at the source as earned income or labour insurance is enrolled in

Furthermore, an employee is defined in the Labour Contract Act as 'one who is employed, works and receives wages'. The definition comprises two elements, namely (1) employment, and (2) payment of wages, as in the Labour Standards Act. Therefore, whether someone is considered to be an employee under the Labour Contract Act will be subject to the same criteria as the Labour Standards Act.

In a franchise agreement, a franchisee is an independent enterprise and it should be deemed that there is freedom to accept or refuse requests to work, instruction for work to be in engaged in, etc. In addition, it is reasonable to consider that there is no direction and supervision in the execution of services. Although there is guidance, training and provision of know-how by the franchisor, these are the performance of obligations by the franchisor in conducting a joint business and mutually raising profits, and they can be thought to be fundamentally different in nature from directing and supervising in an employment relationship. With respect to (3) restrictions on workplace and work times, there may be times when workplaces will actually be restricted (e.g., for shops) and these are obviously necessary for executing business and are different in nature from restrictions on the workplace in employment relationships. Even though there are cases where working time is actually restricted (for example, in the form of shop business hours), the working time of individual workers is not being restricted. All these factors, including those that reinforce a determination of the nature of workers, tend towards denying that a franchisee in a franchisee agreement has the nature of a worker.

Accordingly, a franchisee in a franchisee agreement is considered not to correspond to the definition of a worker under the Labour Standards Act and the Labour Contract Act.

A recent district court decision found that a franchisee of 7-Eleven is not an employee under the Labour Standards Act and the Labour Contract Act because, among other reasons, the franchise agreement specifies that the franchisee is an 'independent business operator'.18

'Workers' under the Labour Union Act

Further, whether a franchisee qualifies as an employee under the Labour Union Act has become a major issue in recent years. An employee is defined in the Labour Union Act as 'those persons who live on their wages, salaries or other equivalent income, regardless of the kind of occupation'. If an employee under the Labour Union Act organises a labour union that meets the requirements of Sections 2 and 5 of the Labour Union Act (a legal union), the union is entitled to protections under the Labour Union Act, including criminal immunity,19 civil immunity,20 acquisition of legal personality21 and remedies for unfair labour practices.22 The Labour Relations Commission considers the following factors collectively and will determine that an employee falls under the Labour Union Act if a certain level of subordination is found:

  1. basic factors: incorporation into the business organisation; unilateral determination on the contents of the contracts; compensatory nature of reward;
  2. supplemental factors: freedom of acceptance or rejection; whether and to what extent there is an employment relationship, time and place constraints, etc.; and
  3. negative factors: certain reason to find that the company has the substance of an independent business operator.

As mentioned above, there have been important cases deciding whether a franchisee is an employee under the Labour Union Act or not.

In one case, the union, which was composed of convenience-store franchisees, filed a petition for relief with the Labour Relations Commission, claiming the franchisor's refusal of collective bargaining was an unfair labour practice. The Central Labour Relations Commission denied the franchisees' employee status and vacated the initial trial order, and each petition for relief was dismissed. In contrast, in a separate case, the Tokyo Labour Relations Board found that the Kumon franchisor's refusal to bargain collectively with a union whose members were classroom-leader franchisees constituted an unfair labour practice.

In the Kumon case, the Commission found facts that were different from those of convenience-store cases in the following respects:

  1. various subsidies from the franchisor reduced the burden of loss on franchisees;
  2. there was very little discretion in classroom management, teaching methods, etc; and
  3. franchisees were required to be directly involved in teaching students.

With regard to point (c), the Central Labour Relations Commission order emphasised that in the convenience-store cases the franchisees were not required to perform the duties themselves (in many cases, part-time workers were employed), while, in the Kumon case, the Tokyo Labour Relations Commission order pointed out that the franchisees were required to provide direct guidance to the students. This point would affect other factors as well. Therefore, the fact that a franchisee is free to assign other persons to carry out its duties is considered significant grounds for denying that the franchisee qualifies as an employee under the Labour Union Act.

v Consumer protection

The Consumer Contract Act will be applied to contracts other than labour agreements and with consumers other than business operators. Since a franchisee is an individual business operator and does not correspond to a consumer, the Consumer Contract Act is not likely to be applicable.

vi Competition law

The franchisor–franchisee relationship is one of the major targets of the Anti-monopoly Act. The Franchise Guidelines issued by the JFTC identify actions by franchisors against franchisees that raise issues from an anti-monopoly perspective.

According to the Franchise Guidelines, practices that may be considered anticompetitive include:

  1. enticing a candidate franchisee into the franchise business by creating a false impression that the franchise business is more advantageous than it really is, by failure to disclose important facts or by false or exaggerated explanation;
  2. demanding franchisees trade only with the designated supplier and prohibiting without good cause franchisees from trading with other suppliers who can provide better conditions than the designated supplier;
  3. requiring franchisees to purchase a certain volume of goods and rejecting the return of excess goods;
  4. where royalties are calculated based on the gross profit on sales, including the cost of loss, prohibiting franchisees from discounting prices to avoid disposal without good cause; and
  5. where the suggestion of the retail price is lawful, imposing restrictions on the retail price of goods.

Recently, the abuse of a superior bargaining position has been the subject of very active discussion. In 2020, the JFTC announced the results of a survey on transactions between franchisors of convenience stores and the franchisees. Currently, the JFTC is revising its Franchise Guidelines to address the issue of unauthorised orders, 24/7 operation and the opening of dominant stores, to clarify the concept underlying the Anti-monopoly Law and to prevent problematic behaviour.

vii Legal principle of continuous contracts

With respect to continuous contracts such as franchise agreements, from the perspective that the expectation of the party (mainly the franchisee in franchise agreements) to continue the contract should be protected, the cancellation of the agreement is generally restricted.

On the other hand, by focusing on the principle of the freedom of contract, opinions recognising the freedom to cancel continuing contracts have been asserted. For example, in a case regarding the exercise of a right to terminate an agreement in a special store agreement for cosmetics, the Tokyo High Court held that an 'unavoidable reason' was not required in exercising the right to terminate an agreement.23 In addition, regarding rejections of renewal of franchise agreements, there have been cases in which it was held that the franchise agreement would end with the expiration of the term of the agreement unless there were special circumstances such as the rejection of renewal violating public policy or the principle of good faith.24 Moreover, with respect to franchise agreements in particular, there are many court precedents that restrict the cancellation of contracts.

viii Applicable anti-corruption laws and regulations

First, bribing public servants in Japan conflicts with the Penal Code and imprisonment of three years or less or a fine of ¥2.5 million will be imposed.25 In addition, bribing foreign public officials conflicts with the Unfair Competition Prevention Act and imprisonment of five years or less or a fine of ¥5 million will be imposed, and it should be noted that if the company fails to give necessary warnings, a fine of ¥300 million or less will be imposed thereon.26

Current developments

As mentioned above, the JFTC is revising its Franchise Guidelines to address the issue of unauthorised orders, 24/7 operation and the opening of dominant stores, to clarify the conceptual basis of the Anti-monopoly Law and to prevent problematic behaviour.

In addition, the Japan Franchise Association (JFA) has announced that it is in the process of certifying an alternative dispute resolution (ADR) procedure to resolve issues between the companies that manage convenience stores and their franchisees. JFA aims to start the ADR procedure from April 2021.

Footnotes

1 Kentaro Tanaka is a senior associate at TMI Associates.

2 Website of the Japan Franchise Association.

3 ibid.

4 Further, strictly speaking, under the Foreign Exchange and Foreign Trade Act, there is a restriction that a prior or subsequent notice must be made if a technology introduction contract relating to aeroplanes, weapons, explosives, nuclear energy or space development will be made with technology that is likely to impair Japan's national security, disturb the maintenance of public order or hinder the protection of public safety; however, we believe this will not become an issue since, fundamentally, one cannot consider engaging in those types of business through franchises.

5 'Listed company' means a company that issues shares listed on a stock exchange and shares that have been registered or designated as those for which the selling prices are announced for over-the-counter sale.

6 This includes instances where 1 per cent or more will be acquired when shares acquired are combined with those that the acquirer already owns, and by combining the shares owned by a person in a special relationship with such an acquirer (for example, a corporation that owns 50 per cent or more of the voting rights through such an acquirer).

7 Articles 25 and 37(i) of the Trademark Act.

8 Article 18 of the Trademark Act.

9 Article 37(i) of the Trademark Act.

10 Judgment of the Supreme Court, 11 March 1997, Minshu Vol. 51, No. 3, Page 1055.

11 Tsutsumino Ohinakkoya case, Judgment of the Supreme Court, 8 September 2008.

12 Judgment of the Supreme Court, 28 January 1964, Minshu Vol. 18, No. 1, Page 136.

13 Tokyo District Court, 12 January 1994, Hanrei Times No. 860, p. 198.

14 Tokyo District Court, 27 January 2009, unpublished.

15 Tokyo District Court, 12 January 1994, Hanrei Times No. 860, p. 198; Tokyo High Court, 28 March 1996, Hanrei Jihou No. 1573, p. 29, etc. Further, if the penalties for some franchisees, when compared with those imposed on other franchisees, are found to be set at relatively high amounts, the possibility of these being deemed as violating public policy and becoming invalid increases relatively.

16 Article 9 of the Labour Standards Act.

17 Labour Standards Act Study Group Report, 'Standard of Determination of the “Worker” of the Labour Standards Act' (1985).

18 Tokyo District Court, 21 November 2018. The court held that this is clearly inconsistent with the franchisee being an employee.

19 Section 1 of the Labour Union Act.

20 Section 8 of the Labour Union Act.

21 Section 11 of the Labour Union Act.

22 Sections 7, 27, etc. of the Labour Union Act.

23 Tokyo High Court, 31 July 1997, Hanrei Jihou No. 1624, p. 55 [Kao Cosmetics Distribution case]. Further, in this case, the Supreme Court did not indicate an express determination in this regard.

24 Nagoya District Court, 31 October 1989, Hanrei Jihou No. 1377, p. 90.

25 Article 198 of the Penal Code.

26 Articles 18(1), 22(2)(vii) and 22(1) of the Unfair Competition Prevention Act.

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