Case 1 (2008)
A company ‘A’ (‘Licensor’) entered into a licensing agreement with a company ‘B’ (‘Licensee’). Under the licensing agreement the Licensee was granted with an exclusive license for the trademark vested in the Licensor. Also pursuant to the licensing agreement the Licensor provided the Licensee with the technical documentation to be used for manufacturing products (i.e. medicine) under the licensing agreement.
One day the Licensee brought a claim before a commercial court to recognize the licensing agreement as simulated and fictitious due to the following. Firstly, in the view of the Licensee, the licensing agreement concerned not only transfer of rights to the Licensor’s trademark, but also of the technical documentation to be used for production of medicine of the same quality as the Licensor had. Hence, the agreement concluded between the Licensee and the Licensor should be regarded as the franchising agreement rather than the licensing one. Thus, in the opinion of the Licensee the licensing agreement should be regarded as simulated i.e. hiding, in fact, the franchising agreement. Secondly, the technical documentation provided by the Licensor under the franchising agreement was not enough to ensure production of medicine by the Licensee. Therefore, the franchising agreement did not aim to occurrence of any legal consequences and thus, the Franchisee believed that it should be regarded as fictitious.
The commercial court stated that pursuant to the Ukrainian legislation under a licensing agreement a licensor grants to a licensee rights to use certain intellectual property objects irrespective of purpose of such use, while under franchising agreements a franchisor grants to a franchisee rights to use a set of the rights vested in the franchisor for production and/or sale of certain goods and/or services. Moreover, the Civil Code of Ukraine stipulates additional obligation of franchisors i.e. to provide the franchisee with technical and commercial documents. Taking into account the above, the commercial court stated that licensing agreements aimed just to use of intellectual property rights objects (irrespective of purposes of such use), while franchising agreements – to use of set of intellectual property rights objects for production and/or sale purposes.
In the present case the commercial court found that the purpose of the licensing agreement concluded between the Licensee and the Licensor was not just to transfer rights to the Licensor’s trademark, but to use such trademark for production of medicine in full compliance with the Licensor’s technical documentation and of the same quality as the Licensor had. Consequently, the commercial court recognized the said licensing agreement as hiding the franchising agreement and thus, as simulated.
In addition, taking into account the Ukrainian legislation in the field of medicine production (i.e. obligation to receive numerous permits, licenses, to agree upon medicine workflow with state authorities etc.), the commercial court found that, indeed, the technical documentation provided by the Licensor was not enough for the Licensee to produce medicine and thus, the Licensee was not able to produce medicine under the Licensor’s trademark. Therefore, the commercial court concluded that the franchising agreement was entered into without intention to create any legal consequences and thus, shall be regarded as invalid.
The above analyzed judgment demonstrates the following essential issues to be taking into consideration by both franchisors and franchisees, while negotiating contractual structure of their relations: (a) entering into licensing agreement (or into set of different agreements e.g. licensing, service, supply agreements etc.), instead of franchising one, may entail the risk that the former may be declared as simulated; (b) franchise (i.e. set of rights granted to the franchisee) shall suffice for the franchisee to set up its franchising business; otherwise, there is a risk that the franchising agreement may be regarded as fictitious and thus, as invalid.
Case 2 (2007)
A company ‘A’ (‘Franchisor’) entered into a franchising agreement with a company ‘B’ (‘Franchisee’). The franchising agreement was registered by the relevant local authority pursuant to the Civil Code of Ukraine and the Commercial Code of Ukraine. The franchising agreement entitled the Franchisor to terminate thereof and to request the Franchisee for damages, if the latter systematically infringed its obligations assumed under the franchising agreement. Moreover, the franchising agreement provided for that if it was terminated on initiative of the Franchisee, the latter should pay compensation to the Franchisor.
One day the Franchisee sent a letter to the Franchisor and notified it about termination of the franchising agreement. The Franchisor just ignored the said letter. Later, the Franchisee sent other letters to the Franchisor to recall the previous letter. However, the Franchisor ignored them as well. Thus, the Franchisee was sure that the franchising agreement was fully effective and valid. Since the Franchisee systematically infringed the franchising agreement, the Franchisor brought a claim before a commercial court for termination of the franchising agreement and for compensation as in the Franchisor’s view termination of the franchising agreement was initiated by the Franchisee (to substantiate its position, the Franchisor referred to the first Franchisee’s letter).
Having considered the case, the commercial court found that the Franchisee, indeed, did not pay fees for franchise for several months that was regarded by the commercial court as systematic infringements of the franchising agreement. Therefore, the commercial court satisfied the Franchisor’s claim in respect of termination of the franchising agreement.
At the same time, the commercial court stated that the Franchisor’s claim for compensation should not be satisfied due to the following: (a) the franchising agreement did not stipulate the exact order of termination thereof by the Franchisee; (b) the Franchisee’s letter notifying the Franchisor about termination of the franchising agreement should not be regarded as a ground for termination as such letter was recalled by the Franchisee; (c) the franchising agreement did not set out a possibility to be terminated unilaterally, especially by means of letters; (d) pursuant to the Civil Code of Ukraine an agreement shall be terminated in the form, in which it is concluded. As under the Civil Code of Ukraine termination of franchising agreements shall be registered, in the view of the commercial court, the franchising agreement concluded between the Franchisee and the Franchisor shall be regarded as terminated only after state registration of such termination.
In light of the foregoing, while agreeing upon the franchising agreement, it is crucial for franchisees and franchisors (a) to define terms and conditions of franchising agreements as detailed and precise as possible; (b) to perform obligations in full compliance with the procedures set forth in the franchising agreement and not to ignore them.
Case 3 (2008)
A company ‘A’ (‘Franchisor’) entered into a franchising agreement with a company ‘B’ (‘Franchisee’). Based on the franchising agreement the Franchisor and the Franchisee concluded sales and purchase agreement, pursuant to which the Franchisee was obliged to buy from the Franchisor products to be later-on sold under the Franchisor’s trademark.
One day the Franchisee stopped paying for the supplied products. Therefore, the Franchisor brought a claim before a commercial court for obliging the Franchisee to pay for the products supplied and for compensation of damages. The Franchisee, in its turn, resisted the Franchisor’s claim. According to the Franchisee, the franchising agreement contained null and void conditions e.g. (a) the Franchisee’s obligation to resell the products supplied by the Franchisor at prices defined on the basis of methodology used in the whole franchising chain; (b) establishment of minimum prices for the products to be sold by the Franchisee; (c) acquisition of the products only from the Franchisor. Therefore, the Franchisee alleged that the franchising agreement should be invalidated on the whole.
Having considered the case, the commercial court stated that under the Civil Code of Ukraine, invalidity of a separate provision of an agreement did not result in invalidity of its other provisions or of the agreement on the whole if it is possible to assume that the parties would have entered into the agreement even without the invalid provisions. It is worth noting that the commercial court did not focus on the detailed analysis of validity of the mentioned provisions. Instead, the court analyzed in details validity of sales and purchase agreement, obligations under which the Franchisee infringed. Finally, the commercial court satisfied the Franchisor’s requirements and obliged the Franchisee to pay for the products supplied and to indemnify damages caused.
Although the court did not analyze, whether the disputable provisions were valid under the Ukrainian law, it is essential to emphasize that according to the Civil Code of Ukraine, provisions of the franchising agreement entitling a franchisor to define prices of the products or fix minimum or maximum price level shall be regarded as null and void. As far as purchase of the products only from the Franchisor is concerned, in general such provisions are permitted under the Ukrainian legislation. However, parties to franchising agreements should take into consideration requirements of competition protection law.
Nataliya Mykolska, Vasil Kisil & Partners, Ukraine