Regulations for the Administration of Commercial Franchising Operations --China Franchise Regulations (I)

中国商业特许经营管理条例

Order of the State Council of the People’s Republic of China-1
The 485th Order

The Regulations for the Administration of Commercial Franchising Operations, which was adopted at the 167th executive meeting of the State Council on January 31, 2007, are hereby promulgated and shall come into force as of May 1, 2007.

Premier Wen Jiabao

Chapter 1 General Provisions

Article 1 The Regulations are promulgated to standardize commercial franchising operations, enhance the healthy, orderly development of commercial franchising, and maintain orders in the market.

Article 2 All commercial franchise operations shall conform to the Regulations.

Article 3 Commercial franchise herein (franchise hereafter) refers to a contractual relationship whereby an enterprise (franchisor hereafter) with registered trademark, trade name, patent and other business resources grants a franchisee the right to use its business resources, and the franchisee operates under a uniform operational model and pays a franchise fee to the franchisor in accordance with terms of the contract.

Individuals and entities, which are not registered enterprises, shall not engage in franchising operation as franchisors.

Article 4 All franchise operations shall be conducted in accordance with the principles of free will, good faith and fair dealing.

Article 5 The Ministry of Commerce shall be responsible for the administration of franchise operations on a national scale pursuant to the Regulations. Commerce regulatory authorities of provinces, autonomous regions, municipalities and districts shall be responsible for the administration of franchise operations therein.

Article 6 Any entity or individual has the right to report activities in violation of the Regulations to commerce regulatory authorities. Such authorities receiving reports shall respond in a timely manner in accordance with the law.

Chapter 2 Franchise Operations

Article 7 The franchisor shall have a mature business model, and the capacity to provide a franchisee with operational guidance, technical support and training services.

A franchisor shall have at least two directly-operated units under operation for more than one year.

Article 8 The franchisor shall register a franchising operation with commerce regulatory bodies pursuant to the Regulation within 15 days of its first franchise contract. Franchise operations within provinces, autonomous regions and municipalities shall register with commerce regulatory authorities therein; franchise operations across provinces, autonomous regions and municipalities shall register with the Ministry of Commerce.

For registration, the franchisor shall provide the following documentations:
(1) A copy of business license or certification of business registration;
(2) A copy the standard franchise contract;
(3) Franchise operation manual;
(4) Marketing plan;
(5) Written affidavit of compliance with Article 7 and supporting documents;
(6) Other files and documents mandated by the Ministry of Commerce.

A franchisor, whose franchises either products or services, shall also provide documents evidencing lawful approval of such franchise operations.

Article 9 Commerce regulatory authorities shall register a franchise operation within 10 days upon receipt of a franchisor’s documents pursuant to Article 8, and notify the franchisor. Said regulatory authorities may request from a franchisor additional supplemental file and documents within seven days if a franchisor’s files and documents are not complete.

Article 10 Commerce regulatory authorities shall publish the name of registered franchisors on government websites and update such websites in a timely manner.

Article 11 To engage in franchise operations, the franchisor and franchisee shall execute a written franchise contract.

A franchise contract shall include the following:

(1) Basic information of the franchisor and franchisee;

(2) Content and the term limit of the contract;

(3) Type, amount and method of payment of franchise fee;

(4) Specific content and the method of providing operational guidance, technical support and training services;

(5) Requirements on the quality and standard of products or services and quality control procedures;
(6) Marketing or advertising of products or services;

(7) Consumer rights protection and responsibilities for remedial damages in franchise operations;

(8) Revision, cancellation and termination of the franchise contract;

(9) Responsibilities for breach of contract;

(10) Methods of dispute resolution;

(11) Other contractual provisions agreed to by the franchisor and franchisee.

Article 12 The franchisor and franchisee shall provide in the franchise contract that the franchisee can unilaterally cancel the contract within an agreed period of time.

Article 13 The term limit for a franchise contract shall be no less than three years, except for express agreement by the franchisee.

The above section does not apply to the renewal of a franchise contract between a franchisor and franchisee.

Article 14 A franchisor shall provide a franchisee a franchise operation manual, and provide a franchisee with franchise operations guidance, technical support and training services in the method agreed to in the contract.

Article 15 The standard and quality of franchise products or services shall conform to relevant laws, administrative regulations and other governmental regulatory measures.

Article 16 If a franchisor requires a fee from a franchisee prior to the execution of a franchise contract, the franchisor shall explain to the franchisee in written format the purpose, condition and method of return of such fee.

Article 17 A franchisor shall utilize the advertising fee collected from a franchisee for purposes agreed to in the franchise contract. A franchisor shall disclose to a franchisee the status of usage of the advertising fee in a timely manner.

A franchisor shall not engage in fraudulent and misleading activities in the course of advertising and publicizing a franchise. In its advertising, the franchisor shall not include content concerning a franchisee’s earnings results in the franchise operation.

Article 18 Without a franchisor’s permission, a franchisee shall not transfer the right to a franchise unit to others.

The franchisee shall not disclose or allow others to use a franchise’s trade secrets gathered in the course of operations.

Article 19 A franchisor shall provide yearly reports to commerce regulatory authorities regarding the franchise contracting status within the first season of each year.

Chapter 3 Information Disclosure

Article 20 A franchisor shall establish and implement a complete disclosure system in compliance with the regulations of the Ministry of Commerce.

Article 21 A franchisor shall provide franchisee written disclosures of information as required in Article 22 at least 20 days prior to the execution of a franchise contract, and the franchisor shall provide a franchisee a copy of the franchise contract.

Article 22 A franchisor shall provide the following information to a franchisee:

(1) the franchisor’s name, address, legal representative, registered capital, scope of business and basic information in franchising activities;

(2) the basic information about the franchisor’s registered trademark, trade dress, patent, patented techniques and operational model;

(3) the type, amount and method of payment of franchise fee (including whether a security deposit is required and the condition and method of return of any deposit.)

(4) the price of and condition therefor the provision of products, services, and equipments to the franchisee;

(5) the specific contents, method and implementation plans of continuous operational guidance, technical support, and operational training to the franchisee;

(6) the specific method of guidance and supervision with respect to the franchisee’s operational activities;

(7) the estimated initial investment for a franchise unit;

(8) the number, location, and operational assessment of all the franchisees inside China;

(9) the abstracts of audited accounting and audit statements of the past two years

(10) any litigation or arbitration involving the franchise operations in the past five years;

(11) the information on whether the franchisor and its legal representative engaged in major illegal operations

(12) any other information mandated by regulatory authorities within the Ministry of Commerce.

Article 23 The franchisor shall provide truthful, accurate, complete information to the franchisee. The franchisor shall not withhold relevant information or provide false information.

If material changes occur to information previously provided by the franchisor, the franchisor shall notify the franchisee of such material changes in a timely manner.

The franchisee may terminate the franchise contract if the franchisor withholds relevant information or provides false information.

Chapter 4 Legal Penalties

Article 24 A franchisor, who is unqualified under Section 2 of Article 7, yet conducts franchising operations, shall be subject to an ordered correction from commerce regulatory authorities, confiscation of profits, a monetary fine between 100,000 and 500,000 yuan, and a public reprimand.

Entities or individuals other than registered enterprises, who conducts franchising operations, shall be subject to an order from regulatory authority to cease illegal operations, confiscation of profits, and a monetary fine between 100,000 and 500,000 yuan.

Article 25 A franchisor, failing to register with appropriate commerce regulatory authorities pursuant to Article 8, shall be subject to an order from such regulatory authorities to register the franchise within a specified time and a monetary fine between 10,000 and 50,000 yuan; if the franchisor fails to register within the specified time, it shall be subject to a monetary fine between 50,000 and 100,000 yuan and a public reprimand.

Article 26 A franchisor in violation of Article 16 and Article 19 shall be subject to an ordered correction from commerce regulatory authorities, and may be issued a monetary fine less than 10,000 yuan; in case of a serious and egregious violation, the franchisor shall be subject to a monetary fine between 10,000 and 50,000 yuan and a public reprimand.

Article 27 A franchisor in violation of Section 2 of Article 17 shall be subject to an ordered correction from Administration of Industry and Commerce, a monetary fine between 30,000 and 100,000 yuan; in case of a serious and egregious violation, the franchisor shall be subject to a monetary fine between 100,000 and 300,000 yuan and a public reprimand; if a violation constitutes a crime, the franchisor shall be subject to criminal liability.

A franchisor engaging in misleading and fraudulent advertising shall be subject to penalties in accordance with the Advertising Law of China.

Article 28 A franchisor in violation of Article 21 and Article 22, reported by a franchisee and confirmed by commerce regulatory authorities, shall be subject to an ordered correction and a monetary fine between 10,000 and 50,000 yuan; in case of a serious and egregious violation, the franchisor shall be subject to a monetary fine of 50,000 and 100,000 yuan and a public reprimand.

Article 29 Criminal activities defrauding others’ money or property under the disguise of franchising shall subject the perpetrator to criminal liability; activities, not constituting a crime, shall subject an actor to penalties in accordance with the Law of Public Security and Punishment of China.

Those conducting pyramid sales under the disguise of franchising shall be subject to penalties in accordance with the Regulations Prohibiting Pyramid Schemes.

Article 30 Employees of commerce regulatory authorities engaging in abuse of authority, professional negligence and self-dealing shall be subject to criminal liability if such activities constitute a crime; if not a crime, such employees shall be subject to punishment in accordance with the law.

Chapter 5 Addendum

Article 31 Laws governing trademark and patent as well as administrative regulations shall apply to issues arising out of franchise operations concerning trademark licensing, patent licensing.

Article 32 Franchising organizations and associations are to, under the guidance of regulatory authorities within the Ministry of Commerce, formulate standards for franchising operations, strengthen professional self governance, and provide services to parties engaging in franchise operations.

Article 33 A franchisor conducting franchising operations before the Regulations goes into effect shall register the franchising with commerce regulatory authorities in accordance with the provisions herein within one year the from the date when this Regulations goes into effect; the franchisor failing to register within said exemption period shall be subject to penalties provided in Article 25.

The franchisor under the above section is exempt from Section 2 of Article 7.

Article 34 The Regulations shall go into effect on May 1, 2007.