China’s rapid economic development and its emerging middle class allow franchises to operate in China under the following model:

The franchisor
• owns a well-known brand with a global reputation;
• has a strong desire to expand its brand in China;
• currently lacks sufficient capital and the traditional franchising model is no longer suitable to support such expansion.

The franchisee:
• has a well-developed distribution network;
• already owns second-line brands for the same or similar products which have already established certain market share in China;
• has ready capital and other operational resources.

By Cecilia Lou, Partner at King & Wood’s Intellectual Property Group


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.