China

• Author: Yu Qin - Richard L. Wageman
• Pages: 142-160

142 International Franchise Sales Laws

China

I. What Is a Franchise?

A. Scope of Law

After China was admitted to the World Trade Organization in November 2001, it

commenced a process to develop a set of laws applicable to the business of fran-

chising in the PRC. Some of China’s early attempts such as the 2004 Measures for

the Administration of Foreign Investment in Commercial Fields and the 2005 Mea-

sures for the Administration of Commercial Franchises were piecemeal, not inte-

grated and ineffective to regulate the franchise business sector. That all changed in

February 2007 when China’s State Council, one of China’s highest governing insti-

tutions, promulgated its first comprehensive set of franchise regulations with the

issuance of the Regulations on the Administration of Commercial Franchise (the

2007 Regulations), which went into effect on May 1, 2007. The 2007 Regulations

were similar in content to some aspects of the earlier measures but contained some

significant changes to address the concerns expressed to the Chinese regulatory

authorities during the preceding two years about the franchising business sector.

In April 2007, the Ministry of Commerce, the governing regulatory agency

(Ministry), issued the Administrative Measures for Archival Filing of Commercial

Franchises (the Filing Rules) and on May 1, 2007, the Ministry issued the Adminis-

tration Measures for the Information Disclosure of Commercial Franchises (the Dis-

closure Rules). In December 2011, the Ministry updated both the Filing Rules and

the Disclosure Rules.

With implementation of the 2007 Regulations, the Filing Rules, and the Disclo-

sure Rules, China finally constructed a solid legal base for the franchising sector

combining prior disclosure and filing requirements with limited interference in the

Franchisor-Franchisee relationship.

The 2007 Regulations define “franchise” to mean an arrangement whereby (1)

an enterprise through an agreement grants other operators the right to use its busi-

ness operating resources, including registered trademarks, logos, patents, and pro-

prietary technologies; (2) the Franchisee conducts business under a uniform mode

of operations; and (3) the Franchisee pays franchise fees according to the agree-

ment. Both individuals and enterprises can conduct franchise activities as a Fran-

chisee, but only an enterprise can engage in franchising activities as a Franchisor.

B. Applicability to Master Franchises

Unlike the 2005 Measures for the Administration of Commercial Franchises the

2007 Regulations do not expressly acknowledge master franchising and area de-

China 143

velopment. The 2007 Regulations define franchising generally, as noted above,

and do not restrict the type of franchise model that can be used in China.

Cross-border franchising by master franchising or area development was not

expressly sanctioned by either the 2004 Measures for the Administration of Foreign

Investment in Commercial Fields or the 2007 Regulations but was a commitment of

China’s WTO accession and the Ministry of Commerce has indicated that cross-

border franchising is permitted.

C. Exemptions

The 2007 Regulations do not provide for any exclusions, exceptions, or exemp-

tions from application of its provisions over any “franchise business” activities in

China.

D. Discretion of Regulatory Authorities

The 2007 Regulations were issued and promulgated by the State Council. The Min-

istry of Commerce has the responsibility for franchising activities and the nation-

wide implementation of the regulations. Through its power to impose sanctions the

Ministry in effect has the authority to interpret the regulations.

E. Jurisdiction

The 2007 Regulations govern all franchise business activities within the territory of

the People’s Republic of China by foreign franchisors, foreign invested enterprise

franchisors and Chinese domestic enterprises.

II. Who Must Provide Disclosure?

A. Franchisor

The Franchisor is required to provide to the prospective Franchisee accurate infor-

mation on specified matters concerning the franchise system to be granted to the

Franchisee and the proposed franchise contract at least 30 days before the franchise

contract is executed.

B. Master Franchisee

The 2007 Regulations and the Filing Rules are silent on disclosure in the master/

sub-franchising situation. While disclosure by a Master Franchisee/Sub-franchisor

to a Franchisee/Sub-franchisee is required as in the Franchisor-Franchisee relation-

ship, the issue of whether the Franchisor must also provide disclosure to a Sub-

franchisee in a sub-franchising arrangement is not clear.