In Brazil, the basic regulation applicable to franchise agreements was Law no. 8,955 of December 15, 1994 and the general provisions of contracts in the Brazilian Civil Code (Law no. 10,406 of January 10, 2002). On December 26, 2019, the Bill Project no. 219/2015 was enacted into the Law no.13,966/19 (“the New Franchise Law”) and revoked the previous one.
The New Franchise Law came into force on March 26, 2020 and establish new rules, among others, such as:
- a broader concept of commercial franchise agreements, including the right to use other intellectual property rights by the franchisee and not only trademarks and patents, as well as the mischaracterization of an end consumer or an employment relationship between the franchisor and the franchisee or his/her/its/ employees, as already recognized by the Brazilian case law (article 1º);
- the possibility of public companies and nonprofit organizations be parties of franchise arrangements (article 2º, §2º);
- the possibility of subleasing the commercial property where the franchisee unit is located by franchisor to the franchisee, when either party will be entitled to propose the renewal of the lease agreement before Brazilian Courts, except in cases of default of the respective lease agreements or the franchise agreement (article 3º, sole paragraph).
In this sense, the New Franchise Law also establishes the possibility of the amount of the rent to be paid by franchisee to franchisor for subleasing the property be higher than the amount that franchisor pays the landlord in the original commercial lease agreement since: (i) it is expressly foreseen in the Franchise Disclosure Document (“FDD”) and in the franchise agreement; (ii) the amount overpaid to franchisor in the sublease does not imply in an excessive burden to franchisee, ensuring the maintenance of the economic and financial balance of the sublease during the term of the franchise agreement.
- expressly allowing the contracting parties to elect an arbitration court to solve disputes related to the franchise agreement, ruling out previously existing controversies (Article 7, §1);
- determine the delivery of the FDD in Portuguese and the need of a sworn translation for international agreements, defining national and international agreements (article 7 and items), as follows:
- national agreements, those that produce effects exclusively in Brazil, which will be written in Portuguese and governed by Brazilian legislation;
- international franchise agreements will be originally written in Portuguese or will have a sworn translation into Portuguese paid for by the franchisor, and the contracting parties may opt, in the agreement, for the jurisdiction of one of their domicile countries;
- the increase of mandatory information to be indicated in the FDD, as detailed below.
The New Franchise Law defines a commercial franchise as a business system whereby “ … a franchisor authorizes, by means of an agreement, the franchisee to use trademarks and other intellectual property rights, always along with the right to product and distribute products or services on an exclusive or non-exclusive basis and also the right to use methods and systems for business implantation and business management or operating system developed or owned by the franchisor, in exchange for direct or indirect compensation, without, however, being characterized as an end consumer relationship or an employment relationship in relation to the franchisee or his employees, even during the training period.”
The New Franchise Law sets forth several pre-sale disclosure requirements of the franchisor’s business to the prospective franchisees, which must be included in the FDD in clear, objective and comprehensive language, written in Portuguese language, as mentioned. The FDD does not need to be registered in any agency or with any governmental body for franchising purposes.
Article 2 of the Brazilian Franchise Law added more items as requirements to enclose the FDD, comparing to the previous Law. The FDD must contain the following mandatory information:
(1) a summary of the background of the franchisor’s business;
(2) complete identification of the franchisor company and of all companies related thereto, and their respective inscriptions at Corporate Taxpayer Numbers;
(3) balance sheets and financial statements of the franchisor company for the 2 (two) preceding years;
(4) indication of lawsuits related to the franchise that question the franchise system or that may compromise the franchise operation in the country, in which the franchisor, the controlling companies, the sub-franchisor and the owners of trademarks and other intellectual property rights are parties;
(5) detailed description of the franchise, general description of the business and the activities that will be performed by the franchisee;
(6) characteristics of the “ideal franchisee” regarding previous experience, educational background, and other characteristics that the franchisee must necessarily or preferably have;
(7) requirements regarding the direct involvement of the franchisee with the operation and management of the business;
(8) specifications regarding: (a) estimated initial investment necessary for the acquisition, implementation and startup of franchise operations; (b) value of the initial affiliation fee or franchise fee; and (c) estimated cost of the facilities, equipment and initial inventory and respective payment conditions;
(9) clear information regarding periodic fees and other amounts to be paid by the franchisee to the franchisor or to third parties, detailing the respective calculation bases and what they remunerate or the intended purpose, specifically indicating the following:
(a) periodic compensation for the use of the system, of the trademark and of the other rights of intellectual property of the franchisor or over which he/she/it has rights, or, for the services provided by the franchisor to the franchisee (“royalties“); (b) payments for lease of the equipment or premises; (c) advertising fee or similar payments; (d) minimum insurance coverage amounts;
(10) complete listing of all the franchisees, subfranchisees and subfranchisors of the chain, as well as of all those who have disassociated themselves with it within the last twenty-four (24) months, with name, addresses and telephone numbers;
(11) the following shall be described with respect to the territory: (a) if the franchisee is guaranteed exclusivity or a right of first refusal in any particular territory or activity and, if so, under what conditions; (b) if the franchisee has the right to sell or render services outside its territory or provide such services outside Brazil; (c) if there are and what are the territorial competition rules between franchisor units and franchise units;
(12) clear and specific information regarding the obligation of the franchisee to acquire goods, services or materials necessary for the establishment, operation or management of its franchise from suppliers designated and approved by franchisor; and the franchisor is required to provide a complete list of such suppliers to the franchisee;
(13) description of services and products offered to the franchisee by the franchisor, with respect to: (a) support; (b) supervision of the chain; (c) services; (d) incorporation of technological innovations to franchises; (e) training of the franchisee and his employees, specifying its duration, content and cost; (f) franchise manuals; (g) assistance on the analysis and selection of the location where the franchise will be established; and (h) layout and architectural standards of the franchisee’s facilities, including physical arrangement of equipment and instruments, descriptive memorial, composition and sketch;
(14) information about the status of the franchised trademark(s) and other intellectual property rights related to the franchise system, which the franchisee will be authorized to use by the franchisor, including complete characterization, with the registration or order number registered, with the class and subclass, before the National Institute of Industrial Property (“INPI”);
(15) consequences of the termination of the franchise agreement, including: (a) the franchisee’s access to know-how of product, process or management technology, confidential information and industry trade, finance and business secrets that you may have access to depending on the franchise; and (b) establishment of competitive activities with the franchisor;
(16) standard franchise agreement draft and, if applicable, the standard preliminary franchise agreement used by the franchisor, with complete text, including its respective exhibits, conditions clauses and expiration dates;
(17) indication of the existence or not of transfer or succession rules and, if so, what they are;
(18) indication of the situations in which penalties, fines or indemnities are applied and the respective values, established in the franchise agreement;
(19) information on the existence of minimum purchase quotas by the franchisee from the franchisor, or third parties designated by him, and on the possibility and conditions for refusing the products or services required by the franchisor;
(20) indication of the existence of a Council or Association of Franchisees, with the attributions, powers and mechanisms of representation before the franchisor, and details of the competences for management and supervision of the application of existing funds resources;
(21) indication of the rules for limiting competition between the franchisor and the franchisees, and among the franchisees, during the term of the franchise contract, and details of the territorial scope, the term of the restriction and penalties in case of non-compliance; and
(22) precisely specification of the agreement deadline and its renewal conditions, if applicable.
Article 2 §1º of the New Franchise Law requires that a FDD “be delivered to the franchisee candidate within at least ten (10) days prior to the execution of the franchise agreement or preliminary franchise agreement, or the payment of any kind of fee by the franchisee to the franchisor or to a company or individual related thereto, except in bidding process or pre-qualification promoted by government agencies, in this situation, the FDD will be divulgated in the beginning of the selection process.”
Failure by the franchisor to deliver such disclosure document at least 10 days prior to the execution of the franchise agreement or the preliminary franchise agreement or any payment by franchisee renders the agreement voidable by franchisee and penalizes the franchisor with the refund of all amounts paid by franchisee, as franchise fees and royalties, duly adjusted for inflation, according to article 2, §2º of the Brazilian Franchise Law.
The same consequences might be applicable in case the franchisor omits information required by law or disseminate false information in the FDD, including possible criminal sanctions, according to article 4 of the mentioned law.
The following aspects are particular of franchise agreements under Brazilian Law, in addition to the general requirements and formalities mentioned herein:
(a) the trademark and/or others intellectual property rights under the franchise agreement must at least be filed at the INPI;
(b) the agreement needs to contain the main aspects of the franchise arrangement such as nature of the franchise, financial terms and conditions, applicable rules to termination and post-termination;
(c) compliance with the New Brazilian Franchise Law, which refers to the delivery of the FDD to franchisee, as mentioned above;
(d) submission of the term of receipt of the FDD to the INPI, duly executed by the prospective franchisee and indicating the date of receipt, besides the submission of the international franchise agreement.
The recordal of international franchise agreements with the INPI is indispensable for the remittance of royalties abroad, to make the agreement effective against third parties and qualify franchisee for tax deductions. After the Certificate of Recordal is issued by the INPI, the agreement needs registration at the Brazilian Central Bank – BACEN for remittance of payments. However, due to the Law nº 14,286/2021, recently enacted on December 29, which will be in force within one year as from December 30, 2021, foreign exchange controls will be simplified for certain situations, specifically related to payment in foreign currency of obligations performed in Brazil to entities domiciled abroad, including the registration requirement at BACEN for royalty remittances. In this sense, many provisions of the mentioned law are yet to be regulated by Brazilian foreign exchange competent authorities.
Finally, the edition of Law No. 13.874/2019, called “Economic Freedom Law”, which aimed to minimize state intervention in private relations – always subsidiary and exceptional – to simplify Brazilian business, was relevant for the interpretation of contracts in general, including franchising. In summary, among other measures, the Economic Freedom Law intended to:
- privilege the autonomy of the parties’ will in the interpretation of the contracts, including confirmed by their behavior after the conclusion of the deal, the uses and customs of that type of business and the rules of interpretation established by the contracting parties (new wording of article 113 of the Brazilian Civil Code);
- avoid contractual revision based on the generic application of the principle of the social function of the contracts, determining the minimum intervention and the exceptionality of this revision (through the new sole paragraph of article 421 of the Brazilian Civil Code); and
- assume the parity and symmetry of the parties in civil and commercial contracts and the allocation of risks intended by them, except for the legal regimes provided for in special laws (new article 421-A).
Luciana Bassani, IDI Country Expert for franchising in Brazil