TRADEMARK LICENSING AND THE RISK OF “INADVERTENT” FRANCHISING

By Nguyen Huy Hoang, Partner of BROSS & Partners

Email: hoang@bross.vn

Trademark licensing (or transfer of trademark use right) and franchising are two of the activities a business can undertake to exploit its intellectual property and expand its business scope.

Because of the similarity and overlap between trademark licensing and franchising, in practice, there have been many “inadvertent” franchising precedents, leading to companies having to suffer adverse consequences, typically, such as (i) administrative fines for non-compliance with franchising regulations and (ii) trademark licensing costs being excluded by the tax authority from reasonable expenses when calculating corporate income tax. Within the scope of this article, “inadvertent” or “accidental” franchising is understood as the cases where the parties conclude a trademark licensing contract but, accidentally, the terms of the contract and/or the actual performance of the contract contain(s) the elements of a franchising transaction.

This article will discuss (i) the overlap between trademark licensing and franchising, and (ii) the adverse legal consequences that may arise for the parties due to “inadvertent” franchising under Vietnamese law. To a certain extent, the article also suggests the implications that other “inadvertent” franchising cases may also occur, which are related to distribution contracts, agency contracts, technology transfer contracts, business cooperation contracts, etc., irrespective of the name.

1. Trademark licensing and the licensor’s controlling right

According to the Law on Intellectual Property 2005, trademark licensing is understood as the trademark owner’s act of granting permission to other organizations or individuals to use the mark within the scope of the owner’s use right. Usually, the licensed trademark is associated with lines of goods or services that the owner has established reputation and affirmed product quality with consumers. In addition, together with the licensing of the trademark, the owner of that mark will transfer the process and technology of producing the goods or providing the services associated with the licensed mark. As an inevitable need, in order to protect its prestige, reputation, and business results, the licensor often includes in the licensing contract the measures to control the quality of goods ỏ services provided by the licensee associated with the licensed trademark. However, the current law does not seem to clarify what is the limit of the licensor's control over the quality of goods or services provided by the licensee. It is mainly this unclear boundary that results in the risk of “inadvertent” franchising as presented below.

2. The overlap between trademark licensing and franchising

According to the Law on Commerce 2005, franchising is a commercial activity whereby the franchisor permits and requires the franchisee to perform the purchase and sale of goods, or the provision of services provided that such performance (i) is conducted in accordance with the business organization method prescribed by the franchisor, (ii) is associated with the trademark, trade name, business secret, business slogan, business symbol and advertising devices of the franchisor; and (iii) the franchisor has the right to control and assist the franchisee in running the business.

As can be seen, franchising has a broader scope and usually contains trademark licensing contents. On the contrary, a trademark licensing contract (or even any commercial contract), if having sufficient elements as prescribed by the Law on Commerce, will be determined as a franchising contract. In practice, it is not difficult to see cases where the licensor, in order to protect its prestige and reputation, includes in the licensing contract such terms that are similar to those of a franchising transaction, for instance, the licensor having the right to inspect, supervise, train, instruct, and require the licensee to comply with procedures, codes of conduct, standards of goods/services/personnel, place of business, facilities, etc., specified by the licensor. With such terms,  unnoticeably, the licensing contract will be simultaneously a franchising contract and that is the so-called “inadvertent” franchising.

3. Legal consequences of “inadvertent” franchising

Under the current law, the franchisor and franchisee in a franchising transaction must comply with the provisions on franchising in accordance with the Law on Commerce and its guidance documents, such conditions for franchising, registration with the Ministry of Industry and Trade of Vietnam, the obligations to provide information, etc. Violations of such provisions may result in fines ranging from VND 1,000,000 to VND 50,000,000 (for individuals) or from VND 2,000,000 to VND 100,000,000 (for institutions). In addition, and more importantly, all profits, including profits from the business under the license contract, as well as licensing fees, arising from the time of commencing the contract performance to the time of sanction may be confiscated by the competent state agency[1].

From the perspective of tax law, in the case the contract between the parties is determined to be a contract for franchising from abroad, but the franchisor has not yet registered its franchising operation with the Ministry of Industry and Trade of Vietnam, the costs of trademark licensing payable by the franchisee may be excluded by the tax authorities from the reasonable deductible expenses when calculating corporate income tax.

It is also worth noting that in the event of a dispute, if the contract between the parties is determined to be a franchise contract and the parties have not yet met the relevant provisions on franchising, the contract may be considered as being void.

From the foregoing, we believe that the risk of “inadvertent” franchising to the parties having a trademark licensing relationship is significant and worthy of concern. Because of the overlapping nature of trademark licensing and franchising, companies need to be careful when entering into a trademark licensing contract or any other type of contract that may have the characteristics of franchising in order to avoid “inadvertent” franchising.

[1] Article 75.6 of Decree 98/2020/ND-CP.

Published on Vietnam Journal of Science, Technology and Engineering (VJSTE) dated Sept., 21st 2021. 

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