Franchising may be an attractive proposition for many companies wishing to expand internationally. Take a look at this overview to discover the applicable franchise law in Romania, covering the essentials for franchisors, the relevant areas of law, selected aspects such as fees, and dispute resolution and applicable law.
ESSENTIALS
about Romania´s franchising law
- All franchising agreements should be registered within the National Franchise Registry;
- The precontractual information that the franchisor is required to provide to the franchisee is expressly regulated. However, there is no restriction regarding the language in which such precontractual information is provided;
- The Franchising Law does not regulate specific provisions regarding foreign franchisors.
RELEVANT AREAS OF LAW
Legal basis of Franchise Law
The legal basis governing franchise is Government Ordinance no. 52/1997 (“Franchise Law” or “GO 52/1997”). The Franchise Law defines franchising as “a trading system of products and/or services and/ or technologies, based on a continuous collaboration between natural persons or legal persons, each of them legally and financially independent from one another. Whereby a person named franchisor grants to another person named franchisee the right and imposes the obligation to operate a business, in compliance with the franchisor’s concept.” A key aspect of the franchise system is the franchise network, meaning the contractual relations established between the franchisor and one or more franchisees, meant to promote a technology, product or service, as well as to streamline the development of their production and distribution. For the purpose of implementing the franchise network, the Franchise Law provides that the franchisor “authorizes and obliges the franchisee, in exchange for direct or indirect contributions, to use products and/or services trademarks, other protected intellectual or industrial property rights, know-how, copyrights, and signs of traders, benefiting from a continuous contribution of commercial and/or technical assistance from the franchisor, within and during the franchise agreement concluded between the parties for this purpose.” Based on Law no. 179/2019, the National Franchise Registry was established in consideration of the European Parliament Resolution of 12 September 2017, on the functioning of franchising in the retail sector. The main purpose of the registry is to ensure opposability and publicity of franchising structures to interested third parties, transparency of the market and to cover the following main topics: registration, amendment/completion and termination.
Corporate Law
The most common corporate form to set up business in Romania is the limited liability company (known as “S.R.L.”) compared to joint stock companies “S.A.”, which may be either private or public, but are less common. Setting-up an S.R.L. is a rather straightforward process without involving significant fees. One or more persons (individuals or legal entities) may set up a, S.R.L., without any required minimum share capital. In the case of an S.A., it is required by law to have at least two shareholders and a minimum share capital of approximately EUR 25.000. Notwithstanding foreign trade law or regulatory requirements regarding foreign investments in certain sectors, Romanian corporate law does not impose any general restrictions on foreign operations in Romania, nor on franchise systems in particular.
Consumer Protection Law
Although it is possible for both legal and natural persons to act as franchisees, the law explicitly states that they act as professionals. This means that they are automatically excluded from consumer protection legislation since their intention to enter the franchise is recognized by the law as business-related. Therefore, provisions concerning commercial agents will apply to both parties.
Antitrust/Competition Law
In Romania, the franchise agreement is regulated by GO 52/1997. GO 52/1997 offers general guidance, with only limited references to competition law, on matters such as: non-compete or exclusivity clauses. That being said, franchise agreements may contain restrictions that collide with art. 5 of Law no. 21/1996 on the Competition Law (the “Romanian Competition Law”) which is, in fact a carbon copy of art. 101 Treaty on the Functioning of the EU (the “TFEU”). Therefore, before implementing any franchise agreement, one should always consider the framework put in place by the European Commission through the EU-Vertical Block Exemption Regulation (“V-BER”) and its accompanying guidelines (Commission Notice–Guidelines on Vertical Restrictions)1 . Under V-BER, some restrictions put in place in the franchise agreements can be exempted from the prohibitions mentioned in art. 5 of the Romanian Competition Law or art. 101 TFEU provided that the respective parties to a franchise agreement do not have a market share of more than 30% each and no other hardcore restrictions exist which will render the entire agreement null and void. Examples for hardcore restrictions are provisions dictating fixed prices/rebates or prohibiting passive sales outside a designated territory (including online sales). In the recent years, the Romanian Competition Authority focused its investigations primarily on vertical relationships2 , therefore we recommend bespoke competition law advice before the implementation of any major vertical commercial relationship. Finally, please note that a franchise agreement that complies with the local legislation concerning such agreements (i.e., GO 52/1997) is not automatically complying with Romanian/ European competition law. Therefore, a qualitative analysis of the agreement must be performed, in order to assess whether a franchise agreement is in line with its specific provisions and other relevant provisions such as competition law. The analysis will be based around V-BER and its accompanying guidelines.
1 Please note that the V-BER and its accompanying guidelines apply to “vertical agreements” as agreements or concerted practices entered into between two or more undertakings, each of which operates at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. The V-BER includes vertical agreements containing certain provisions relating to the assignment of intellectual property rights (IPRs) to or use of IPRs by the buyer in its application, and thereby excludes all other vertical agreements containing IPR provisions. The V-BER applies to vertical agreements containing IPR only when certain conditions are met.
2 Competition Council’s Decision no. 65 dated 31 October 2012 regarding the commitments assumed by Fornetti Romania S.R.L. – price fixing agreement – the franchisor imposed a minimum price to be followed by the franchisee. Competition Council’s Decision no. 39 dated 14 September 2015 regarding the sanctioning of Secuiana SA and its distributors/franchisors - price fixing agreement - the franchisor imposed the margins for the franchisee, among many others vertical restrictions.
Employment Law
A deemed employment risk could arise under Romanian labour legislation and needs to be considered regarding franchisees. If the franchisee’s activity mirrors an employment relationship, Romanian labour authorities/courts of law could reclassify the franchise relationship into an employment relationship. As such, they could impose the conclusion of an employment contract with the franchisee and apply fines for undeclared work. Personal tax liabilities might also arise. A potential requalification to employment would consider how the relationship is established in the franchise contract (particularly, the parties’ rights and obligations), what are the concrete circumstances and elements characterizing the franchisee’s activity and if they indicate the existence of a relation which has characteristics belonging to employment relationship. Therefore, it is important to ensure that in substance, the franchisee’s activity is an independent activity.
IP Law
In principle, based on a franchise agreement, the franchisee is granted with the right to use protected trademarks, patents, know-how, copyright and other protected intellectual or industrial property rights of the franchisor. These rights may be granted for a period which is at least the equal to the duration of the franchise agreement. However, the law states that the franchisee must not disclose the know-how provided by the franchisor to third parties, neither throughout the duration of the franchise agreement nor thereafter. The franchisor may impose a non-compete and confidentiality clause as well, to prevent the know-how being disclosed without prior authorization during the execution of the exclusivity clause. Before implementing non-compete or confidentiality clauses, especially post-term clauses, we strongly advice performing a competition law review of such provisions.3 However, although these rules are provided by law to govern the franchise agreements, the franchisors still need to ensure the proper IP protection, for instance by registering their trademarks, patents etc.
3 Please refer to Antitrust/Competition Law section.
SELECTED QUESTIONS/ASPECTS
Precontractual disclosure
The local franchise law explicitly governs this phase. Precisely, the franchisor must provide the future franchisee with information enabling them to participate in the performance of the franchise agreement, after being fully aware of the facts.
The franchisor must provide the franchisee with an information disclosure document, which should contain specific data relating to: a) the franchisor’s history and experience; b) details of the franchise management’s identity; c) the dispute history of the franchisor and their management; d) the initial amount to be invested by the franchisee; e) the mutual obligations of the parties; f) copies of the financial results of the franchisor in the last year; g) information on the pilot unit (until the start of its franchise network, the franchisor shall effectively operate a business concept for a period of at least one year, in at least one pilot unit). Documents regarding the information disclosure should be registered by the franchisor/ master franchisee with the NFR. Moreover, advertising for the selection of franchisees must be unambiguous and contain no erroneous information, while advertising documents, which present a franchisee’s expected financial results, will need to be objective and verifiable.
With regards to language, in which the disclosure documents and franchise agreements must be drafted, the Franchise Law does not regulate any rule on this matter, giving a possibility for the parties to choose the language of drafting their contractual framework. However, the Franchise Law states that the franchise contract must clearly and with no ambiguity define each party’s rights and obligations and liabilities, as well as any other clauses regarding the collaboration between the parties. Throughout the agreement’s execution, the franchisee must provide the franchisor with any information that facilitates knowledge and analysis of actual financial performance and situation, to ensure effective management in relation to the franchise. That being said, all the information provided must be in line with rules and regulations regarding the exchange of sensitive information as to avoid any competition law related risks. Romanian Franchise Law does not provide any special rules in this respect. Thus, the contractual provisions and general legislation, i.e., Civil Code, will apply. This is also applicable in terms of contractual liability/claims for any damages and personal liability involving individual officers, directors and employees of the franchisor. There is a possibility where the franchisee can cancel or rescind the franchise agreement due to franchisor´s violation of the obligation to disclose. In this case, the Franchise Law expressly stipulates that any case of rescission or early termination of the agreement should be clearly stipulated under the agreement. The Franchise Law clearly stipulates that the franchise agreement should expressly regulate the matter of sub-franchising and assignment. In this regard, the contractual provisions would be supplemented by the general legal provisions of the Civil Code and by specific provisions, where applicable, such as trademark law. Also, in the case of a sub-franchise, the obligation to provide precontractual information is applicable to contracts concluded with the sub-franchisee. The Master Franchisee is required to provide the related disclosure document to the sub-franchisees. The Master Franchisee may use the information provided by the franchisor, emphasising its own contractual obligations. The Franchise Law clearly stipulates that the franchise agreement should expressly regulate the matter of sub-franchising and assignment. In this regard, the contractual provisions would be supplemented by the general legal provisions of the Civil Code and by specific provisions, where applicable, such as trademark law. Also, in the case of a sub-franchise, the obligation to provide precontractual information is applicable to contracts concluded with the sub-franchisee. The Master Franchisee is required to provide the related disclosure document to the sub-franchisees. The Master Franchisee may use the information provided by the franchisor emphasising its own contractual obligations.
Legal restrictions
There are no such restrictions imposed under Romanian law. However, if the franchise business entails the acquisition of land, it should be noted that persons/entities from countries outside of the EU/EES may obtain ownership over land in Romania only based on a mutual agreement between Romania and their country of origin. They may obtain other real rights over land should the franchise business require them.
Confidentially
The franchisor may impose a non-compete and confidentiality clause, to prevent the know-how being disclosed without prior authorization during the exclusivity clause’s execution. The confidentiality clause may be extended to other aspects as well. A breach of the confidentiality clause may be sanctioned similar to other contract defaults and depending on the situation, a party may seek interim measures to prevent any unlawful use of any information, either in opposition to the other party and if the case arises, to other third parties. Before implementing confidentiality clauses (especially post term confidentiality clauses), it is strongly advised to perform a competition law review of such provisions. Under certain conditions, confidentiality clauses could be regarded as non-compete clauses and must be analysed in the context of V-BER and its accompanying guidelines.
Amendments
If the franchise agreement contains a precise and reasonable clause regarding amendments, considering the franchisees interests, unilateral amendments of the agreed terms by the franchisor are admissible as an expression of the franchisor’s obligation to continuously develop its franchise system according to changing market conditions. Without a respective provision, amendments of the franchise agreement may only be agreed between franchisor and franchisee—an almost impossible task in terms of uniform regulations once a franchise system has reached a size with a large number of franchisees. Special care must be taken in case of a dominant franchisor (i.e., where the franchisor holds a market share of more than 40% on its relevant market) as to not discriminate, impose unfair trading conditions or any other practice that falls inside the scope of dominance abuse.
Termination
As the law requires parties to provide the contract’s duration, it should be noted that unless otherwise agreed, the contract cannot be unilaterally terminated. Furthermore, in case of a contract breach, a prior warning should be provided before issuing a termination notice, unless otherwise agreed. The reasons for termination should be substantial and the law also states that termination for breach of con - tract may be enforced without a prior warning, only if it was provided in the contract. Special care must be taken in case of a dominant franchisor (i.e., where the franchisor holds a market share of more than 40% on its relevant market) as to not unlawfully refuse to deal by way of termination of an existing agreement. Refusal to deal is considered a practice that falls inside the scope of dominance abuse.
Renewal and Transfer
Franchisors are free to decide whether or not to renew a franchise agreement. Parties may also provide a clause for an automatic extension of the agreement, if preferable, otherwise renewals should be done explicitly. It is admissible to contractually restrict a franchisee's ability to transfer its franchise, typically by requiring an explicit prior written approval of the franchisor.
DISPUTE RESOLUTION AND APPLICABLE LAW
COVID-19
GEO 29/2020, regulating certain moratoria measures related to COVID-19 pandemic only marginally, is concerned about the situation of professionals carrying out their economic activities in shopping centres (malls etc.,) that were closed during the state of emergency. Thus, probably the most consistent measures in favour of these small and medium-sized enterprises was the deferred payment for utility services—electricity, natural gas, water, telephone and internet services, as well as deferred payment of rent for the building destined for registered office and secondary offices. However, no legal provision was regulated in relation to the franchising fees or other related contractual fees.
By Georgiana Singurel, Partner, and Silvia Axinescu, Senior Managing Associate, Reff & Associates, Deloitte Legal
