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However, a cooperation agreement is hard to reach since the parties have different expectations. For example, the Chinese franchisee generally wishes to obtain permanent exclusive distribution rights within China, and would not want to be restricted to a subordinate position forever. On the other hand, the franchisor must maintain the quality of products and services provided by the franchisee, or risk damaging the reputation of brand.
 

Therefore, it is important to find a structure which will not only satisfy the franchisee, but also provide sufficient protection for the franchisor' s brand. As such, the franchisor may consider setting up a joint venture ("JV") with the franchisee, and assign the brand's Chinese trademark rights to the JV. As a shareholder in the JV, the requirement of "being in control" of the franchisee is more or less satisfied. At the same time, as a shareholder of the company, the franchisor, although it may be unable to have total control of the operation, may also be able to become involved in the company management thereby reducing some operational risks.
 

However, it should be noted that in circumstances where the JV pays a trademark transfer fee and the trademark rights are transferred to the JV, the JV itself will be the owner of trademark rights in China. As the PRC Trademark Office will not accept assignment with restrictions, it is thus impossible to require the Trademark Office to examine conditions attached with the assignment agreement. As a result, if the two parties of the assignment have any disputes over the terms and conditions of the assignment, they can only bring the matter to the court or an arbitration body. This is to say that, once the Trademark Office has approved the trademark assignment, the franchisor cannot reclaim the trademark in the event of disputes.
 

Suggestions for a Franchisor
 

A. Choose your franchisee wisely
 

When the franchisor evaluates a franchisee, it not only needs to have a thorough understanding of the franchisee's strengths, but is also required to look into the franchisee's experience with protecting its own business model, business philosophy, and its own brand. Moreover, even after the franchisor has selected its franchisee, it must be sure to strictly control and monitor its franchisee, and prevent any actions that are inconsistent with its brand image, even if it has to consider termination of the franchising agreement.
 

B. Develop a long term global strategy

In practice, the Chinese market has shown that some of the world's leading multinational corporations which have a well-established network of trademark rights in western countries often neglect to develop a Chinese trademark strategy until they are ready to enter the Chinese market. However, these companies often find it difficult to register their brands, because their brands have already been registered by some other companies in China, or there are already a number of similar trademarks in the Chinese market. In order to unify a global brand, these companies have had to temporarily slow down their expansions, and address the companies' trademark issues first.

Another common problem that multinational corporations face is ineffective Chinese interpretation of their trademark. They often believe that all they need is a Chinese translation of their trademark. However, most Chinese consumers believe that the "Chinese translation" is a trademark of a Chinese product, while a foreign trademark is the corresponding translation. The foreign companies will be placed in a very passive position if the Chinese version of their trademark becomes well-known, and they cannot effectively file their trademark registration.

It is more common that franchisors forget to protect Chinese versions of their brands' domain names and keywords, and thus, they get registered by others. If a company has protected the rights of its Chinese trademark, it can easily acquire a domain name that someone else has registered by using the PRC' s laws against cyber-squatting. However, if the trademark has been registered only in a foreign language, it will be very difficult to defend.

C. Ensure the enforceability of the terms of its agreement

A particularly difficult issue for franchising parties to resolve is how to restore the status quo between the parties when a dispute arises. Apart from the problems caused by the nature of dealing with intangible assets, many other problems arise from the procedures that each country's intellectual property regime imposes and the difficulty of implementing a foreign judgment in another country. Therefore, it is very important for the parties of a franchising agreement to consider national procedure laws and relevant international laws to reduce the risk that the franchise agreement will not be enforceable.

D. Consider franchisee a “regional franchisor” by developing a strong partnership.

Franchisor should stop considering the franchisee a regional agent but a true partner in a brand. This will change the franchisee from being the franchisor's agent to the franchisor's regional franchisor in China, and will enable the brand owner to promote its brand while taking advantage of the franchisee' s knowledge of the consumer market in China.
 

I. Franchising Trends in China

A. Trend 1: Franchising of Services Derived from Product Trademarks

Generally, franchising is a complete and compact business model that focuses in one particular limited industry area. For example, "Ten Fu' s Tea," is a tea shop where people may taste tea before they buy, but it is not a tea house with tea tasting “services". In franchising, very few companies mix product trademarks with service marks. Mostly, companies prefer to distinguish between the two, for example, IBM was mainly a computing brand, but its after-sale service brand is "Blue Express."

However, franchising in China recently saw the development of a new trend which extends the product trademark to the service sector. In other words, franchising may extend from the manufacturing industry to the service industry. For example, Shanghai Jahwa's mark "HERBORIST" is a trademark for high-end cosmetics that can only be bought in company-owned stores. This limitation on the brand is a clear message to consumers that only company-owned shops sell that product line, and any other channel where the product line is available is not officially authorized. By doing so, the company greatly reduces the possibility of its products being counterfeited and crosses from the manufacturing phase to the retail phase. Moreover, it ensures the quality of the product line, and that the brand will always be connected with "high-end" products. Once this brand acquired market recognition, Shanghai Jahwa opened the "HERBORIST SPA" salons through franchising, which extends the brand from a product brand to a service brand as well.

B. Trend 2: Franchisees dissatisfaction with dependency

In order to maintain quality, franchisors often intervene into operations of the franchisees and take strict control of the franchisees' management. The franchisors often set various restrictive provisions in their franchising agreement and franchisees are often controlled or restricted by the franchise agreements with respect to branding activities, management models, supplies and so on, and must give up control in strategic decisions. For example, franchisees do not have flexibility to adjust its operational model to suit local customers' needs. As a result, although a franchisee is legally an independent owner, it is in fact a subordinate of the franchisor. As the franchisee improves over time, it becomes obvious that the franchisees will feel uncomfortable with their obligations on payment of royalties, advertising fees, and training fees to the franchisor.

During the current economic downturn, when a company wishes to expand, the first and foremost issue is looking for capital. Many multinational companies have since decided to expand into the Chinese market. Under such circumstances, multinational corporations often try to work with strong local Chinese companies under franchising arrangements. However, a franchisee who only obtained territorial authorization is often dissatisfied with its subordinate position. This is particularly apparent if the franchisor has to rely on a franchisee' s financial support and distribution networks. The franchisee will then desire a stronger position which may lead to future conflict.

This situation is more likely during the current financial crisis as more franchisors need to rely on the franchisees' financial support. This new imbalance may cause a franchisee to gradually deviate from the franchisor's control, the unified management standards, and quality requirements. The faster a franchisor expands his franchising businesses, the bigger a franchising territory is, the harder for the franchisor to control franchisees. Any deviation from the spirit of franchising will ultimately damage the franchised brand, and result in losing its market completely.

As this series continues, we will examine how franchisees exert influence on franchisors and provide suggestions for franchisors to maintain control.