China Law and Practice The most common legal challenges with a franchise | Page 4

The China Question: Expanding a Franchise

The International Perspective

Execute a detailed franchise agreement

There are various legal challenges relating to the establishment of a franchise including issues relating

The franchise agreement should clearly address your requirements for the operation of the franchise

to the statutory requirements for engaging in franchising, choice of the franchisees, control over your

(like store design, staff uniforms and service quality). It can also restrict the franchisee’s right to

distribution network and protection of your intellectual property.

purchase products from other suppliers, or to sell products not bearing your brands or outside a
designated territory. However, if you have a dominant market position in the business, any restrictions

Check your business capacity

should be carefully designed because restricting a franchisee’s purchases or sales may constitute:
“an abuse of the dominant market position”. This abuse violates Chinese anti-monopoly laws.

First, as required by law, you need to have at least two directly managed stores operating for more
than one year in order to be a franchisor. Your company’s business scope should also cover franchise

Besides, even if you do not have the dominant market position, you are not allowed to fix the resell

activities, usually with the wording like “retail by means of franchise”. If not, you will have to extend

prices or restrict the minimum resell prices of the products to be sold by franchisees to third parties,

your business scope first.

as this is also a violation of Chinese anti-monopoly laws.

Carefully select your franchisees

Your franchisee may also have access to your intellectual property, including your trademarks, sales
expertise or special management software that you have developed for your business. Make sure you

Before executing