SPAIN: New Regulation on Franchising.

I. GENERAL IDEAS

Article 62 of the Retail Act (as amended by Act 1/2010 of March, 1st) contains the basic regulation on franchise agreements. Paragraph 2 of this Article includes the obligation of franchisors to inform the Franchisors Register within three months, of the starting of their activity. This obligation is also compulsory for franchisors not established in Spain but intending to have this activity in our country.

This Royal Decree has been approved considering the EU legislation, particularly Regulation 2790/1999 of December 22nd and Directive 2006/123/ CE of the European Parliament and Council of December 12th.

The object of the Royal Decree is the establishment of the minimum basic conditions to develop the franchise activity and the functioning and organization of the Franchisors’ Register foreseen by the Retail Act.

II. DEFINITIONS

The Royal Decree provides some definitions.

Franchise activity is the agreement by which a party (Franchisor) grants to other party (Franchisee) in a particular market and in exchange of a direct and/or indirect financial compensation, the right to develop a Franchise on a commercial activity previously developed by the Franchisor with enough experience and success.

This Franchise will consist in the marketing of products or services and will include, amongst others:

1. The use of a common name or other intellectual or industrial rights and a uniform presentation of the premises or transport means,
2. The transfer by the Franchisor to Franchisee of some owned, substantial and specific technical knowledge or know how,
3. The provision by the Franchisor to the Franchisee of business or technical assistance or both during the term of the agreement, all without prejudice to the powers of supervision that may be established in the contract.

A Franchise will not necessarily be the commercial concession or exclusive distribution contracts, whereby an undertaking agrees to purchase, under certain conditions, usually branded products that gives some exclusivity in an area, and in order to resold them also under certain conditions, as well as to provide buyers of these products support once the sale has been completed.

Neither will be considered as a Franchise the following:

1. The granting of a manufacturing license.
2. The transfer of a trademark for use in a given area.
3. The transfer of technology.
4. The transfer of use of a commercial label.

A principal franchise agreement or master franchise agreement is an agreement by which the Franchisor grants to the Master Franchisee, in return of a direct and/or indirect financial compensation the right to operate a Franchise for the purpose of concluding franchise agreements with third parties (the Franchisees), under the system defined by the Franchisor, assuming the Master Franchisee the role of franchisor in a particular market.

III. DISCLOSE OF INFORMATION TO THE POTENTIAL FRANCHISEE

With a minimum term of twenty working days before the signature of the franchise agreement or pre-agreement or before the delivery by the prospective Franchisee of any payment to the Franchisor, the Franchisor or Master Franchisee must give in writing to the potential Franchisee the following truthful and not misleading information:

1. Identification of the Franchisor as appears in the Commercial Registry, when appropriate. In the case of foreign Franchisors it will also be necessary to disclose the data in the records required in the respective franchisors’ registers according to the laws of their country of origin. In case of a Master Franchisee also the previous information of its Franchisor.
2. To justify that they have received for Spain, and have in force, the title or license to use the mark and logos of the Franchisor, and any judicial appeals lodged that could affect ownership or use of the trademark, if any, with expression, in any case, of the duration of the license.
3. General description of the activity covered by the Franchise, including the most important data.
4. Experience of the Franchisor, including, inter alia, the date of incorporation of the company, the main stages of its evolution and development of the network. e. Content and characteristics of the Franchise and its operation, including an explanation of the business system included in the Franchise, the nature of know-how and trade or technical assistance that the Franchisor will provide, as well as an estimate of the investments and expenses necessary for the implementation of a business type. In the event that the Franchisor will deliver to the potential Franchisee individual estimates of sales, figures or results of operation of the business, they must be based on experience or studies that are adequately substantiated.
5. Structure and expansion of the network in Spain, including the way the network will be organized and the number of businesses established in Spain, distinguishing between those directly exploited by the Franchisor of those operated under a Franchise. Franchisor should also indicate the city in which the business are located and the number of franchisees that have ceased to belong to the network in Spain in the last two years, stating whether the termination was caused by expiration of the contractual term or by other reasons.
6. Key elements of the Franchise agreement setting out the rights and obligations of the respective parties, duration of contract, terms of resolution and, where appropriate, of renewal, economic considerations, exclusive covenants, and limits and restrictions for the Franchisee to carry out its business.

The Franchisor may require the potential Franchisee a confidentiality agreement of all contractual information it receives or will receive from the Franchisor.

IV. FRANCHISORS’ REGISTER, DISCLOSURE OBLIGATION AND CONSOLIDATED FRANCHISORS.

According to the Retail Act, Franchisors have to communicate the starting of their activity to the Franchisors’ Register within three months. Franchisors are also obliged to inform on any modification of the information previously disclosed, in a term of 3 months since the modification has taken place.

The Register is an administrative one and its purposes are only of information and publicity and will not condition the starting of the activity.

The disclose of the information will be done to the Franchisors’ Register of the Autonomous Community in which the activities will start or to the Central Register at the Ministry of Industry, Tourism and Commerce in case the Autonomous Community has not foreseen it.

Franchisors operating in an EU Member State operating in Spain under free services regime without a permanent establishment will only be obliged to communicate the starting of the activities in Spain to the Register.

The information to disclose will be:

1. The starting of the activity following the special Form approved and included in the Royal Decree. This information contains the general data of the Franchisor or Master Franchisee, kind of Franchise (owned, master or foreign Franchisor), owner of the Franchise, number of premises, intellectual property, description of the Franchise, commercial name of the Franchise and other voluntary information,
2. Any modification of the information previously disclosed according to a second Form also approved and included in the Royal Decree.
3. In January every year any closing or opening of premises, either owned or franchisee, during the previous year.

On a voluntary basis and with the purpose of publicity and information, Franchisors may also enter in the Register the following information:

1. The possession of a quality certificate attesting compliance with quality standards and identification of the provision on which it is based.
2. Adhesion to a system of judicial settlement of disputes between Franchisor and Franchisee.
3. The signing of codes of good practice in the field of franchising.
4. Adhesion to the consumer arbitration system and other systems of court settlement of disputes in relation to complaints raised by consumers.
5. Other information that may be considered of public interest.

Franchisors’ Registers of the different Autonomous Communities as well as the Central one will be coordinated and the procedure simplified. Only one communication will be required, and the different registers guaranty their inter-functionality.

Within the Franchisors Register a specific section for consolidated franchisors will be set up.

Franchisors are considered consolidated when they satisfy at least the following two conditions:

1. They have developed a Franchise for at least two years in two franchised premises, and
2. They have a minimum of four premises, of which two at least must be owned ones.

V. REPEAL

The Royal Decree repeals previous regulations on Franchise and Franchisors’ Register, particularly and expressly Royal Decree 2485/1998 of November 13th and Royal Decree 419/2006 of April 7th.

Ignacio Alonso, agency & distribution Country Expert for Spain.

The text of the law, together with the relevant legislation on agency, distribution and franchising, can be found in the Legislation Section of the Website.