China now has more than 4,500 franchise systems, more than any other country in the world. However franchising in China is still in a growth stage and there are a number of abuses and complaints that are too common.
On January 10, 2012 MOFCOM issued the “关于 ‘十二五’ 期间促进商业特许经营健康发展的指导意见” or “Guidance on the Promotion of the Healthy Development of the Commercial Franchising in accordance with the Five Year Plan.”
To improve the situation MOFCOM proposes to improve the currency of its information systems, including the web site; and to increase its enforcement efforts, including violations of trade secrets and intellectually property rights and the Commercial Franchise Regulations. They also want to increase the registration rate for franchisors. It is suspected that a large number of franchisors in China, and in particular foreign franchisors, have not registered as required with MOFCOM.
Specifically on enforcement they plan to make greater use of the resources of the local commerce departments. Our firm has already experienced the results of this new policy. We recently filed a complaint about a competitor of one of our clients who was franchising without registering. We soon received a copy of a letter from MOFCOM to the local commerce department requiring them to conduct an investigation to confirm our allegations, and to report by a specific date.
MOFCOM also plans to work on revisions to the main “Commercial Franchise Administrative Regulations” from the State Council and MOFCOM’s “Commercial Franchise Information Disclosure Administrative Measures,” and to introduce dispute resolution mechanisms.
Revised Version of the Franchise Registration Measures Issued
Earlier on December 21, 2011 MOFCOM released a revised version of the 商业特许经营备案管理办法 (Commercial Franchise Registration Administrative Measures) to come into effect February 1, 2012.
While there were hopes that there would be changes to the requirement that franchisors must have operated two units for one year to be registered as a franchisor with MOFCOM, there have been no changes that affect this rule yet.
The amendments do clarify the nature of some information than must be provided to MOFCOM, and show an increased emphasis on enforcement of the registration requirement.
In Article 6 the list of documents required in an application was changed to require an original copy of the first franchise agreement in China, and FIEs must now submit their approval certificates. Article 8 was amended to specify that only changes to three specific types of information need be reported to MOFCOM, and the scope of Article 9 has been narrowed. And finally Article 15(4) was amended to emphasize that the addresses of all franchisees in China shall be available on the MOFCOM web site.
Anticipating the theme of more enforcement using more of the resources of the local commerce departments, the revised version of the Measures specifically provide for delegation to local departments and provide that authorities are to follow-up on complaints.
Revisions to the Foreign Investment Catalogue
On December 24, 2011 the国家发展和改革委员会 or National Development and Reform Commission, the successor to the former State Planning Commission, finally published the amended外商投资产业指导目录 (2011) or “Foreign Investment Industrial Guidance Catalogue 2011.” The previous version was published in 2007.
Added to the “permitted” category were “wholesalers and retailers engaging in franchising, business management and distribution.” This clarifies the existing practice with respect to franchising.
Foreign Investment Industrial Guidance Catalogue 2011 (in Chinese) : http://www.ndrc.gov.cn/zcfb/zcfbl/2011ling/t20111229_453392.htm
No matter what your proposed investment is in China, one of the first things you should do is check the Catalogue as to the status of the sector.
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