Franchising as a model is considered an attractive proposition in the culture of entrepreneurship. It provides for higher revenue in a controlled investment scenario and at a reduced risk. There is already brand equity which has been created and the franchisors must simply adhere to the terms of the franchisee model to effectively capitalize.
The Vietnamese market is considered an attractive franchising foothold in Southeast Asia in many potential fields such as food and beverage, education, healthcare, entertainment, children’s services, convenience stores, etc. It has always shown great potential for franchising activities with local and foreign investors being equally interested. It is a destination of many famous international brands, who have obtained the required license to market such as Zara, Holiday Inn, McDonald’s Subway, Carl’s Junior, Sonic, Dunkin’ Donuts, Starbucks, Wendy’s, and many others
Along with franchising, the licensing of industrial property objects is also considered to be a popular and emerging trend in Vietnam. However, due to several similarities viz. the model, some individuals and organizations still do not have a clear distinction between the franchising and the licensing of industrial property objects. In this article, D’Andrea & Partners will help its readers to have a better view of the terms involved in both franchising and licensing.
Vietnamese law regulates commercial franchising activities in the Commercial Law 2005 (“the Commercial Law”). and related guiding Decrees and Circulars.
The definition of a “franchise” is covered in Article 284 of the Commercial Law, defining franchise as a commercial activity whereby a franchisor authorizes and requires a franchisee to conduct the purchase and sale of goods or provision of services on its behalf.
Different rules apply depending on whether the franchisor is a foreign or domestic company. Foreign franchisors shall register with the Ministry of Industry and Trade (MOIT) before conducting franchising activities in Vietnam, whereas no such requirements are provided for domestic franchisors. For any business to be franchised in Vietnam, it should have been in operation for at least a year in accordance with art. 5, Decree 35/2006/ND-CP (the “Decree 35”).
The licensing of industrial property rights (“IPR”) is instead regulated in the Vietnamese Intellectual Property Law. With an IPR licensing, the owner of an IPR will grant, to another organization or individual, a faculty of use within the scope of the owner’s right(s), which may be either on an exclusive or non-exclusive basis, provided that the protection of such IPR has been duly approved in Vietnam along with production of a registration certificate.
Distinctions Between Franchising and Licensing of Industrial Property Rights
Franchising and licensing industrial property rights seem similar because they both involve licensing activities of IPR. However, in essence, these are two completely different business activities, which can be ascertained based on the following criteria:
The first criterion for distinction is the contracts’ subject. The subject of a franchise contract is broader. It is a transfer associated with the franchisors’ trademarks, trade names, business knows-how, business slogans as provided by the franchisor. Whereas, the licensing of industrial property objects only stops at the transfer of the right to use industrial property objects, in franchising, that is only a part of the transferred rights.
The second criterion is the relationship of the parties in contracts. In franchising contracts, the relationship between the parties is very close. The franchisee will follow standards, techniques, etc. set forth by the franchisor and be subject to the franchisor’s control related to the contracts’ subject. In return, the franchisor is obliged to help and support the franchisee during the validity of the contract, for initial training and to provide help with traders on how to manage the franchise system. In other words, upon franchising, the franchisor allows the franchisee to conduct production and business activities in the ways that the franchisor has been applying.
In contrast, with respect to a contract of licensing industrial property rights, the transferee, apart from using the licensor’s IPR, has no other relationship with the licensor’s business. In other words, the licensee is only entitled to use intellectual property objects to conduct his own business and does not receive any assistance from the licensor regarding the licensed rights. If any, it is only the initial technical support which is provided when transferring the using rights of industrial property objects in the form of data, documents, expertise etc.
The third criterion is fees. The fee in a franchising contract is the payment for the aggregate use of all intellectual property rights assigned by the franchisor to the franchisee, whereas under the contract of licensing industrial property objects, the fee is paid for each object of licensing.
The activities of franchising and licensing comes with its own set of characteristics. The business entity should choose the suitable business activity to bring itself the maximum commercial benefit.
In order to facilitate the abovesaid activities and to align with both international trends and standards, Vietnam’s legal framework has been undergoing significant developments. New guiding documents on commercial matters, investments, and intellectual property have been issued recently, while a draft law amending and supplementing the current Law on IP is also being prepared. Keeping all of these developments in mind, Vietnam is slowly and steadily emerging as the next go to destination for franchising and licensing with international franchise brands now commonly seen in the streets and shopping centers of Vietnam’s major cities.