Franchising Comparative Guide

• Published date: 28 July 2021
• Subject Matter: Corporate/Commercial Law, Franchising
• Law Firm: Schneider Group
• Author: Mr Thomas Mundry and Evgeniya Sinanova

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

Under Russian law, franchise agreements are called 'commercial concession agreements' and are governed by Chapter 54 of Part II of the Civil Code (Articles 1027-1040). In addition, general provisions of the Russian Civil Code - especially those on general aspects of contract law and obligations - apply. The granting of rights to use intellectual property is governed by provisions of Part IV, Section VII of the Civil Code, entitled "Rights to the Results of Intellectual Activity and Means of Individualization" (eg, provisions governing licence agreements or those defining the types of intellectual property which can be the subject of franchising agreements).

Although the parties to an international franchising agreement may choose foreign law as the law governing the agreement, provisions of Russian public laws (eg, those of the Russian Civil Code stipulating the requirement to register the grant of a licence with the Federal Service for Intellectual Property (Rospatent) and provisions in the fields of consumer protection, advertising, currency control, certification and licensing, protection of competition, tax and customs and data protection) apply regardless (see question 7.2).

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

In general, there are no legal restrictions on foreign franchisors offering franchises to Russian businesses, directly or indirectly. Moreover, international franchising agreements may be governed by a national law other than Russian. If the parties choose foreign law, only certain mandatory Russian laws will apply (see questions 1.1. and 7.2).

1.3 Do any special regimes apply in specific sectors?

Russian law establishes an obligation to obtain a licence for conducting certain types of activities - for example:

• the production and distribution of pharmaceuticals;
• the production and maintenance of medical equipment; and
• passenger transportation services.

A franchisee that will conduct such activities under a franchising agreement is obliged to obtain a licence. If the franchisor establishes a subsidiary in Russia in order to provide franchises through it, this daughter company will also be subject to the abovementioned licensing requirements.

Restrictions relating to corporate ownership and control also apply in the media and telecommunications industries.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

In Russia, there is no special franchising regulatory body. The federal executive body responsible for control and supervision in the field of IP rights is Rospatent, which has a number of competencies, including:

• registration of trademarks and service marks, inventions, utility models, industrial models, and other IP rights;
• registration of disposals of intellectual property (including the grant of a licence under a franchising agreement); and
• maintenance of state registers of intellectual property.

Through civil law enforcement procedures, the rights holder or its exclusive licensee may file a claim in a state commercial (arbitrazh) court to demand:

• cessation of the unlawful use of intellectual property;
• withdrawal from circulation and destruction of counterfeit products; and
• reimbursement of damages or monetary compensation.

Also, licensees may seek protection against licensors for breach of contract.

Certain categories of IP-related issues, including franchising disputes, may also fall under the competence of the dedicated Russian Intellectual Property Court.

Criminal liability for illegal use of intellectual property in the event of substantial damage caused to the rights holder or repeated infringement can be imposed by the courts of general jurisdiction. The investigation of such cases falls under the competence of the relevant bodies of internal affairs (police).

Administrative proceedings relating to the unlawful use of intellectual property and unfair competition associated with the use of intellectual property fall under the competence of the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) or the Federal Anti-monopoly Service.

1.5 What is the regulator's general approach in regulating the franchise sector?

The franchise sector is not regulated by a regulatory body. With regard to intellectual property, Rospatent is guided by the existing laws when registering franchising agreements, as well as their amendments or termination.

In 2014, Rospatent adopted Recommendations on Reviewing Agreements on the Disposal of Exclusive Rights for the Use of the Results of Intellectual Activity and Means of Individualisation, including franchising agreements. The recommendations provide guidance on the assessment of documents submitted for the registration of grants of licences under franchising agreements.

Although some provisions of the recommendations seem questionable to the author (eg, those allowing the registration of franchising agreements to use a firm name), they imply flexibility in certain aspects. For instance, although only commercial legal entities and individual entrepreneurs can enter into franchising agreements, the recommendations suggest that registration should not be denied if the submitted franchising agreement does not contain details identifying the individual acting as one of the parties as an individual entrepreneur. In the view of Rospatent, the reasonableness and good faith of participants in civil law relations should be assumed in such situations.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

There are several franchise associations in Russia. Membership of these associations is not mandatory, but may yield certain benefits for franchise businesses.

The most important franchising association in Russia is the Russian Franchise Association (RFA). This was established in 1997 as a non-profit public organisation with the purpose of supporting and protecting the interests of its members in order to create a favourable legal and economic environment for the spread of franchising in Russia. To become a member of the RFA, a franchisor must:

• provide evidence of trademark registration and a sample of its commercial offer for franchisees; and
• accept the RFA Ethical Code.

Membership of the RFA is subject to fees established by the association.

The RFA issues publications and organises seminars, exhibitions, and other events, including business delegations to other countries. It represents the interests of its members before the authorities, public organisations of entrepreneurs and other businesses. Moreover, the RFA provides consulting services and helps foreign brands to adapt to the specifics of the Russian market. In 2020, the RFA submitted proposals to the Russian government on government support measures for franchisees required due to the spread of COVID-19.

More information about the RFA can be found at https://rusfranch.ru/.

If a business decides not to join a franchise organisation, it will still be entitled to engage in franchising activities on the franchisor or franchisee side. However, it will be unable to enjoy the services and other benefits associated with membership.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

The franchising model emerged later in Russia than in Western Europe and the United States. Franchising (commercial concessions) was first regulated in 1996 through the adoption of Part IV of the Russian Civil Code.

Today, Russia is a world leader in terms of growth in the number of franchises. According to a report by Franshiza.ru, the volume of the Russian franchising market at the end of 2019 was about RUB 2.8 trillion. Currently, the share of Russian franchisors exceeds the share of foreign franchisors and continues to grow. Many Russian franchisors - such as Pyaterochka, MegaFon and FixPrice - have become widely known outside the country.

However, the conditions for franchising in Russia are not always ideal. The problems include:

• imperfect and underdeveloped legislation;
• a lack of suitable real estate;
• uneven prevalence across the territory; and
• many offers from little-known franchises that have no real value.

This situation can be explained by the fact that franchising in Russia has a relatively short history and does not yet fully meet global standards. However, the intense pace at which the Russian franchising market is developing suggests that non-compliance with such standards should rapidly decrease. As a result, Russia's relatively young franchising market should not lag behind mature markets in the future.

2.2 In which sectors is franchising most common?

The business sectors in which franchising is most common in Russia are as follows:

• Services for individuals and businesses (more than 40% of franchise offers): This sector covers a wide range of services, including
• • travel agencies;
  • beauty salons and barber shops;
  • dry cleaners;
  • auto repair shops;
  • educational, IT and medical services; and
  • support services.

The fact that the service sector ranks first in Russia is surprising, as worldwide the restaurant and cafe sector occupies this position. This reflects the creativity of Russian businesspeople in finding new channels for their business.

• Restaurants and cafes (more than 20% of franchise offers): Russia is home to franchises for a wide range of catering establishments, from small fast-food cafes to drinking establishments and restaurants of various national cuisines.
• Non-food retail trade (about 20% of franchise offers): This sector includes
• • clothing;
  • footwear;
  • sporting goods;
  • household goods;
  • goods for pets; and
  • pharmacies.
• Retail trade in...