A decade ago, cafes with the same trademark and the same style of service, menus, uniforms and decoration were a phenomenon. The cafes attracted many customers-most of them under 30. Vietnamese people might have thought that those cafes were invested and operated by a single owner. They might not have known that each cafe was owned by an independent entrepreneur and that each was one in a chain of "franchises", a term that hardly existed in Vietnam then.

In fact, franchising is well suited to Vietnam where there is a strong culture of entrepreneurship. It is a good method for small-and medium-size entrepreneurs who want to start a new business in a short period of time to have a more limited risk, a modest amount of invested capital, and the promise of a stable income. Although most existing franchise operations in Vietnam are in the fast food and beverage business, franchising has potential to develop in other sectors. A strong surge of interest in foreign franchised businesses is anticipated among local entrepreneurs. So too, interest from foreign franchisors is expected to grow.

This article discusses general international franchising practice and how franchising is recognized and regulated under the laws of Vietnam. Another part of this article will discuss different franchising modules that a foreign company can adopt in order to establish its presence. One is through the conventional medium. That is, a franchisor appoints a franchisee, creates a traditional franchise relationship, and the franchisee sells the product/service to the public. The other is for the franchisor, in effect, to become the investor, either alone or with others, and to set up its own outlets to sell directly to the public.

International practice

Although it originated centuries ago, franchising first became popular as a business form in the United States in the 1950s. It has taken hold in Asia: Thailand, Hong Kong, Philippines, China, Japan. Some countries have specific franchising legislation; others do not.

In the United States, franchising is governed by laws that require franchisors to inform prospective franchisees in some detail about the system, the risks, and what they are obligated to do. In the United States, this information is contained in a document called the Uniform Franchise Offering Circular ("UFOC"). Under federal and state rules, a franchisor cannot offer a franchise until the franchisor has prepared a UFOC and discloses information such as its business experience, past or pending litigation, franchise fee, initial investment, restrictions on sources of supplies, and much more.

The UFOC or its equivalent has been adopted in many other countries, including the Industrial Code -Franchising in Australia, the Act on Fairness in Franchise Transactions in the Republic of Korea, the Arthur WishaI1 (Franchise Disclosure) law in Ontario, Canada, Measures for the Administration of Commercial Franchise Operations in China, and the Model Franchise Disclosure Law adopted by the International Institute for the Unification of Private Law (UNJDROIT) 1.

In most countries, once a UFOC has been issued, the government does not intervene and the parties are free to negotiate and enter into a franchise agreement. Under the US rules, there is no requirement to register, file, review or approve any disclosures or agreements by, say, the Federal Trade Commission or other regulatory body. Several states require a franchisor to notify or register its UFOC, but no state requires a franchise agreement to be registered. Neither do Singapore, the Republic of Korea, Japan, Italy, and most other countries. Laws on intellectual property rights in Asia vary widely, but generally speaking, registration of an intellectual property licensing agreement is not required.

Franchises under existing law

Definition of franchise

When the franchise business first emerged, it was thought to be primarily a form of technology transfer and was governed by technology transfer law-that is, Decree No. 11/2005/ND-CP of the Government dated February 2, 2005 ("Decree 11")2. Decree 11 classified franchising which is literally translated as "grant of a special commercial right" -as a form of technology transfer. Decree 11 defined franchising as a relationship whereby the transferee uses the trade name, trademark and knowhow of the transferor in order to conduct a commercial service business. A franchise was viewed from a legal standpoint, as creating a commercial relationship.

Information disclosure

As it related to franchising, no equivalent of the UFOC was required in Decree 11. That is, there was no disclosure requirement. It was the absence of disclosure that resulted in the failure of some franchising systems in Vietnam. As we discuss below, information disclosure is now a requirement for a franchise business.

Registration requirements

Decree 11 required that a franchise agreement had to be implemented under two fundamental documents:

  • a technology transfer agreement ("TTA") which had to be registered with the Ministry of Science and Technology ("MOST"); and
  • a trademark licensing agreement ("TLA"), which had to be registered with the National Office of Intellectual Property ("NOIP").

Many franchisors claimed that this dual registration requirement was time consuming, duplicative, and ultimately unnecessary.

Limited duration

Further, since a franchising agreement was considered to be a TTA, it was subject to the maximum duration of seven(7) years. It might be ten (10) years in certain cases.

Commercial Law provisions

Definition of franchise

On June 14, 2005, a new Commercial Law was adopted by the National Assembly. The new Commercial Law defines franchising to be a commercial arrangement, under which a party -the franchisor -grants another party -the franchisee -the right to carry out the business of selling its goods or supplying services. The transfer of intellectual property is now a subset of the commercial arrangement. The following conditions apply:

  • the franchisee may carry out the business under a format determined by the franchisor and to affix trademarks, tradenames, business logos, slogans, and advertisement of the franchisor at the franchisee's business premises; and
  • the franchisor has the light to control and assist the franchisee to carry out the franchised business.

Following the new Commercial Law, on March 31, 2006, the Government issued Decree No. 35/2006/ND-CP. It specifically regulates franchising activities in Vietnam ("Decree 35"). Decree 35 applies to franchising activities between Vietnamese parties as well as franchising activities that involve a foreign party either the franchisor or the franchisee. Decree 35 expressly states that it supersedes previous regulations on franchising. Accordingly, Decree 11, which is discussed above, is no longer applicable to franchising activities.

Decree 35 gives a rather comprehensive interpretation of franchising. It includes:

  • rights received by a party, i.e. the franchisee, from a party, i.e. the franchisor, to carry out a business under a system determined by the franchisor and to affix trademarks, tradenames, business logos, slogans, and advertisement of the franchisor at the franchisee's business premises;
  • rights received by a primary franchisee from a franchisor under a master franchising agreement;
  • rights received by a sub-franchisee from a sub-franchisor (i.e. the primary franchisee) under a master franchising agreement; and/or
  • rights received by a franchisee from a franchisor under a franchising development contract, which allows a franchisee to carry out the franchised business at more than one location within a locality.

Master franchise

As we discuss above, Decree 35 covers a master franchise agreement whereby a franchisee receives rights from the primary franchisor including the right to act as a sub-franchisor and the right to grant a franchise to a sub-franchisee. When we refer to a foreign franchisor in this article, we intend to include a foreign entity that has been awarded a master right to subfranchise a business in Vietnam. A particular condition for a sub-franchise arrangement under a master franchise is that a local franchisee that receives a franchise from abroad cannot sub-franchise to a sub-franchisee unless that local franchisee "has already run [the primarily franchised business for at least a year: " The purpose of this restriction, as we understand, is to help ensure the sustainable development of a franchising network. The theory is that the primary franchisee should gain experience to run the franchised business before sub-franchising others.

Information disclosure

It is also interesting that Decree 35 now requires an information disclosure document, something equivalent to the UFOC. Such information disclosure document must b made in a format that contains compulsory contents as prescribed by the Ministry of Trade ("MOT") under its Circular No. 09/2006/ TT-BTM dated May 25, 2006 ("Circular 09"). It must be submitted to the MOT or the provincial Department of Trade in order to register the franchising activities as we discuss below.

For the second part of this article, please see Part 2.

1. UNIDROIT is an independent intergovernmental organization with its seat in Rome.

Before the issuance of Decree 11,the concept of franchising was also recognized in the legislation on technology transfer – that is, Circular No. 1254/1999/TT-BKHCNMT dated July 12, 1999, of the Ministry of Science, Technology and Environment. That Circular classified a franchise agreement as a form of technology transfer in which a transferor gave a trademark license along with a right to use technology or business know-how.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.