Japan

• Author: Souichirou Kozuka - Takashi Kanai
• Pages: 266-287

266 International Franchise Sales Laws

Japan

I. What Is a Franchise?

A. Scope of Law

In Japan, a Franchisor’s duty to make presale disclosures to prospective Franchi-

sees arises from two different sources. One is the Medium-Small Business Retail

Promotion Act (Act), supplemented by the Ministerial Order to Implement the Act

(Ministerial Order). The Ministry of Economy, Industry and Trade (the Ministry),

together with the Small Businesses Agency, is in charge of the Act and the Ministe-

rial Order. The second source of disclosure duty is the Guidelines on Franchising

under the Antimonopoly Act (Guidelines).

Section 11 of the Act provides that a person who presides over a “qualified

chain-store business” must deliver a Disclosure Document before concluding a con-

tract with an applicant for a membership to the qualified chain-store business. The

Act, in Section 4 (5), defines “chain-store business” as follows:

[A chain-store business] means a business in which, according to a standard

contract, goods are continually sold, directly or by a designated third party,

and assistance over the operation is continually given, principally to me-

dium- or small-sized retailers.

According to Section 2 (1) of the Act, a retailer is “medium- or small-sized” if

(a) its amount of the stated capital is 50 million yen or less, (b) the number of its

permanent employees is 50 or less, or (c) it is an individual or a cooperative. A

“retailer” is defined in Section 2 (2) of the Act as a merchant principally engaged in

the retail business. “Principally” as it appears in the definitions of “chain-store busi-

ness” and “retailer” is understood to mean more than a half. The official commen-

tary published by the Small Businesses Agency states that the retail business includes

the following, besides the simple business of selling goods that are purchased from

the supplier:

1. businesses selling goods and repairing them;

2. businesses producing goods and selling them on the spot;

3. gasoline service stations;

4. automobile dealers;

5. restaurants;

6. street vendors; and

7. businesses of door-to-door sales or mail order sales.

Japan 267

A qualified chain-store business is a special class of chain-store businesses. The

Act defines it as “a chain-store business for which such a standard contract is em-

ployed as provides that a trademark, a trade name or any other sign is licensed to,

and initial franchise fee, security deposit or any other fee is to be paid by, a member

at the time of acquiring a membership.”

The Antimonopoly Act is the antitrust law in Japan, regulating three types of

acts that impair competition in the market: private monopolization, unreasonable

restraints of trade, and unfair trade practices. The Japanese Fair Trade Commission

(JFTC), the governmental agency that enforces the Antimonopoly Act, issued the

Guidelines to show how the Antimonopoly Act will be applied to franchise agree-

ments.

Paragraph 1 (1) of the Guidelines defines franchising as “a form of business in

which the Franchisor gives the Franchisee a right to use a trademark or trade name,

and controls, guides and assists the operation of the Franchisee in sales of goods or

services in a uniform manner.” Under the Guidelines, a franchise agreement “gen-

erally” includes the following clauses and limits the scope of application to such

franchises:

1. license of a trademark or trade name of the Franchisor to the Franchisee;

2. control or guidance of the Franchisee to ensure a uniform image of the

business toward third parties and support for the operation of the Franchi-

see;

3. payment of fees with regard to the above; and

4. termination of a franchise agreement.

Though this is a rather ambiguous delimitation of the scope, the Guidelines may

not be applicable to a franchise agreement that lacks most, if not all, of these clauses.

B. Applicability to Master Franchisees

Whether or not the duty of disclosure under the Act and the Guidelines is applicable

to Master Franchisees is not clear. It is suspected that a master franchise system was

not known when the Act was enacted in 1973. In many cases, the master franchise

agreement, unlike a unit franchise agreement, is not based on a standard contract

but negotiated between the Franchisor and the Master Franchisee. Therefore, a mas-

ter franchise agreement is unlikely to satisfy the definition of the chain-store busi-

ness.

The Guidelines do not mention Master Franchisees either, despite the fact that

they were entirely revised in 2002. It could be argued that the scope of application

of the Guidelines refers to “the franchise agreement between the Franchisor and the

Franchisee” so that the system of master franchise, in which the Franchisor does not

enter into an agreement directly with the Franchisee, is not covered by the Guide-

lines. However, there is no authority to rely on in this regard.